ECB keeps rates on hold

ECB keeps rates on hold

ECB urges eurozone countries to be bold in order to reduce deficits, as Greece unveils debt-reduction plan.

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The European Central Bank (ECB) has decided to keep interest rates on hold, the eighth month that it has opted to keep its monetary policy unchanges.

Announcing the rate decision, Jean-Claude Trichet, the ECB’s president, stressed the need for Greece and other countries in the eurozone to take “bold” and “courageous” measures to cut their budget deficits.

The Greek government today unveiled a multi-annual plan to bring its deficit down to 2.8% of gross domestic product (GDP) by 2012 compared to an estimated 12.7% in 2009. Greece’s economy was plunged into crisis in December because of investor concerns about the country’s ability to pay its debts. The country’s problems have prompted fears about the stability of the eurozone. The Greek plan foresees that the deficit will be slashed through an overhaul of the tax system, spending cuts, a civil service hiring freeze and salary caps for highly paid civil servants.

Trichet said that Greece, and any other eurozone country, should not expect “special treatment” from the ECB. He said that eurozone countries benefited from being part of a “credible” currency.

Trichet quashed speculation that the ECB might delay reintroducing pre-crisis collateral rules in order to ensure that it is able to keep accepting Greek bonds. The rules, which require government bonds to have a credit rating of A- or higher to be used as collateral with the central bank, are supposed to be reintroduced at the end of this year. The credit rating agencies Fitch and Standard & Poor’s both rate Greek bonds below this threshold.

“We will not change our collateral policy for the sake of any particular country,” Trichet said. He said that fiscal consolidation in the eurozone was “essential to improve confidence”.

He said the idea that Greece’s difficulties might force it to leave the eurozone was an “absurd hypothesis”.

Trichet also warned eurozone countries against prioritising tax cuts over budget consolidation. “Tax cuts should only be considered over the medium term, when countries have gained sufficient room for budgetary manoeuvre,” he said.

The German government is trying to resolve internal splits over €24 billion of tax cuts that are supposed to be introduced by the end of 2011. The tax cuts were demanded by the Free Democrats, the junior partner in Germany’s ruling coalition. Leading members of the government, including Finance Minister Wolfgang Schäuble, have raised concerns that the cuts are fiscally irresponsible.

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• The Greek debt-reduction plan will be sent to the European Commission tomorrow, before being discussed by finance ministers at a meeting on 18-19 February.

Ministers will next month set a deadline for Greece to bring its deficit to within 3% of GDP, the limit allowed under the EU’s stability and growth pact.

 

Authors:
Jim Brunsden 

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