ECB offers new emergency support to banks

October 6, 2011 - 9:25 AM
Luxembourg EU Financial Crisis

European Central Bank President Jean-Claude Trichet attends the Eurogroup ministers meeting in Luxembourg, Monday Oct. 3, 2011. The eurozone's financial chiefs faced tough decisions over how to deal with Greece's debt crisis on Monday after Athens' admission that its deficit will be higher than promised sent markets tumbling. (AP Photo/Yves Logghe)

BERLIN (AP) — The European Central Bank offered new emergency loans to banks on Thursday to help steady them through the government debt crisis, but decided to keep interest rates on hold despite fears of a sharp economic slowdown.

President Jean-Claude Trichet did not even indicate that a rate cut was due in coming months, which many experts expect will be necessary to stave off a possible new recession.

"The economic outlook remains subject to particularly high uncertainty and intensified downside risks," Trichet said, adding however that "at the same time interest rates remain low" and that inflation will likely remain high for months.

Instead, Trichet focused on measures to keep the financial system working properly. The ECB will offer an unlimited amount of 12-month and 13-month loans to banks. That will provide banks financing for a longer period and shield them from turbulence in borrowing markets.

The ECB will also keep offering unlimited amounts of credit at its shorter-term lending operations of up to 3 months through the first half of next year.

Many European banks are exposed to losses on Greek debt. That has made borrowing between banks, crucial for their daily functioning, increasingly difficult because of fears the money might not be repaid.

Trichet said the bank would also buy up to euro40 billion ($53 billion) in covered bonds, a type of security used by banks to raise funding. The ECB's presence will help free up that credit market and make borrowing easier for banks.

The bank has maintained throughout the crisis that its unconventional measures such as extra credits are kept in a separate track from interest rate policy, and Thursday's decisions continued that stance.