ECB sees "substantial" effect from cheap money offer
The ECB left interest rates on hold, pausing to assess the impact of back-to-back cuts and a slew of other measures it unleashed late last year that are showing signs of helping fight the euro zone debt crisis.
"The extensive recourse to the first three year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence," ECB President Mario Draghi told a news conference after it held its benchmark rate at 1.0 percent.
To help fight the euro zone debt crisis, the ECB provided banks with nearly half a trillion euros of three-year money in December, called LTRO, and will make a similar offer in February.
French President Nicolas Sarkozy has urged banks to use the cheap three-year loans to buy sovereign bonds of euro zone strugglers and strong debt auctions in Spain and Italy on Thursday suggested some may be doing that, with analysts saying abundant liquidity helped support demand.
"The more time passes ... the more we see signs it has been an effective policy measure," Draghi said. "This decision has prevented a credit contraction that would have been ... much, much more serious."
Banks remain very reluctant to lend to each other, so the ECB's action has helped keep the system working although there is less evidence that the money is making its way into the real economy.
At the first chance to get 3-year funds, banks took a record amount of 489 billion euros in late December, though so far much of the money has returned to the ECB as overnight deposits.
The decision to leave rates on hold after cuts in November and December - taken unanimously - was in line with market expectations and financial markets showed little reaction.
"This confirms our expectation that the ECB wants to stay in wait-and-see mode at the moment and digest what the latest data are telling them about the magnitude and depth of the recession in the euro area," said Nomura economist Jens Sondergaard.
Alongside the extraordinary liquidity to banks, the ECB has eased its collateral rules and kept buying Italian and Spanish government bonds although it continues to baulk at doing so to the more dramatic extent which some policymakers have urged.
Spanish and Italian yields both fell sharply at Thursday's auctions and Spain shifted twice the amount of bonds it expected to.
"It's too early to say whether this is linked directly to the LTROs but the yield movements should suggest that some of the sovereign debt crisis is abating," Sondergaard said.
Signs of stabilization?
Draghi said the euro zone economy continued to face high uncertainty but added there were some signs of stabilization.
At his first meeting at the helm in November, Draghi said the euro faced a mild recession. He did not repeat that in his early comments on Thursday.
"Ongoing financial market tensions continue to dampen economic activity in the euro area, while, according to some recent survey indicators, there are tentative signs of stabilization activity at low levels," he said.
Draghi also said the ECB was pleased that euro zone leaders had confirmed the involvement of private creditors in the second Greek bailout was "unique and exceptional".
Greece's prime minister held crunch talks with the head of a group representing private sector banks on Thursday, as officials said negotiations on a voluntary swap of bonds to lighten the country's debt burden entered the final stretch.
But senior European bankers say talks about private sector creditors paying for part of a second Greek bailout are going badly, raising the prospect that euro zone governments will have to increase their contribution to the aid package.
The ECB has persistently argued against private sector involvement, arguing it would increase contagion risks.
ECB policymaker Athanasios Orphanides last week called for a reversal of PSI. Draghi did not do similar.
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