ECB keeps interest rates low as recession looms

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By DAVID McHUGH, Associated Press

FRANKFURT, Germany (AP) — 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 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 eurozone 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. The ECB must interpret mixed signals from the economy, with some indicators, such as Germany's Ifo index of business sentiment, pointing up while other signs such as German exports have pointed down.

The bank has another offer of credit to banks coming up for allotment on Feb. 29, and some analysts think the takeup could exceed the euro489 billion from the first one on Dec. 23. That move is credited with easing fears of imminent meltdown from the government debt crisis. It helped banks pay off bonds coming due in the first quarter, and some of the flood of money was used by banks in financially weak countries to buy their governments bonds.

Draghi urged banks to take the money if they needed and said there should be "absolutely no stigma" in participating. It is "a business decision and should be presented as such."

The stronger demand for short-term government bonds eased access to credit for countries such as Italy and Spain, which are struggling to keep fears of default from turning into self-fulfilling panic.

Greece, Ireland and Portugal have already needed bailout loans from the eurozone governments and the International Monetary Fund to avoid disruptive debt defaults. Greece is in the process of negotiating a debt reduction with its creditors.

Many economists warn that the liquidity blast is only a temporary respite. The crisis still threatens disruption from Greece, which appears to have concluded difficult negotations over austerity measures in return for another bailout. Eurozone finance ministers are meeting to discuss the agreement later Thursday.

Without the bailout, Athens faces the prospect of a potentially devastating default in March, when it has a bond redemption to pay.

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