ECB keeps rates low as recession looms

FRANKFURT: The European Central Bank kept its key interest rate at a record low of 1 percent on Thursday as it waits to see if the 17-nation eurozone needs more help to stave off recession.

Its president, meanwhile, dodged questions about whether the bank could help Greece lighten its debt load by getting involved in a bond writedown deal being negotiated with creditors.

Mario Draghi said that for now the ECB sees “tentative signs of a stabilization in economic activity” and expects the eurozone economy “to recovery very gradually in the course of 2012.”

Some experts predict the region will slip back into recession, and Greece’s huge debt problems remain a constant source of concern.

Draghi ducked questions about whether the ECB would give up profits on the Greek bonds it holds, as suggested by some officials, in order to help European leaders finance a second bailout package for Athens.

He did, however, leave open a legal door for the ECB to help lighten Greece’s debt load at some point, saying the bank could distribute profits it stands to make on its Greek bonds to member states. That is standard procedure for any profits made by central banks — the governments could then do what they want with the money.

The European Union's economic affairs chief said Greece still needs to convince eurozone partners that it will implement economic reforms and budget cuts before it can get a new bailout.

Olli Rehn confirmed that the "troika" of inspectors — the EU, European Central Bank and IMF — had reached a last-minute, "stafflevel" agreement with the Greek government on a new austerity program.

"Not a minute too early, but of course many goals are scored in injury time," the European Commission vice president said on arrival in Brussels for talks on Greece with eurozone finance ministers.

The ECB is prohibited from financing a government, so it cannot take an actual loss on the Greek bonds by agreeing to forgive debt, but Draghi said that sharing profits would be legal.

Still, it wasn’t clear how that might contribute to helping Greece.

The ECB “still refrains from an active role in a Greek debt restructuring,” said Carsten Brzeski, an analyst with ING in Brussels.

The central bank has mainly relied on two rates cuts and emergency liquidity to banks to stabilize the eurozone’s financial system and protect it from a looming recession. It appears to have left the door open to more rate cuts if the economy worsens.

It has now left the refinancing rate, the rate it charges banks for borrowing, alone for two straight meetings after cutting it by a quarter point in November and December.

It has also flooded the banking system with cheap loans — a move credited with easing fears of possible government defaults and bank failures. The Bank of England also left rates unchanged but announced it would buy 50 billion pounds ($79 billion) more in bonds to stimulate the lagging British economy. Output contracted 0.2 percent in the fourth quarter and another quarter of shrinkage would officiall mean recession.

Many economists think the euro zone economy shrank in the fourth quarter and is going through a period of weakness, with the main question being how deep will the downturn be and how quickly things will pick up again.