European Central Bank cuts rates and unveils bank help
Stocks drop as ECB rules out eurozone support
(40 minutes later)
The European Central Bank has cut interest rates back to their historic low of 1%, as expected by markets.
Stocks have fallen after the European Central Bank ruled out any substantial aid for any ailing and indebted eurozone states.
The quarter-point cut comes as crisis and recession threaten the eurozone.
Stocks in France and Italy - two countries vulnerable to downgrades - fell 2% and 3.2%, respectively.
ECB President Mario Draghi also unveiled new support measures for eurozone banks, but played down the prospect of any new financial support for struggling governments.
ECB President Mario Draghi unveiled new support measures for eurozone banks, but played down the prospect of any new financial support for governments.
The moves come just ahead of a "do-or-die" Brussels summit of EU heads to hammer out a plan to save the euro.
The central bank cut interest rates to their historic low of 1%, as expected.
The euro, which had risen following the announcement of the interest rate cut, fell more than a cent against the dollar while Mr Draghi was speaking.
US and UK shares both fell 0.6%. German shares were down 1.7%.
Stock markets also fell, with the French Cac 40 index dropping 2.5%, and Italy's FTSE MIB down 3%.
There had been speculation that the ECB may be preparing to bail out Italy if eurozone governments agree tough new limits on their borrowing and economic reforms.
There had been speculation that the ECB may be preparing to bail out Italy if eurozone governments agree tough new limits on their borrowing and economic reforms.
But Mr Draghi seemingly ruled this out: "We have a treaty that says no monetary financing to governments."
But Mr Draghi seemingly ruled this out: "We have a treaty that says no monetary financing to governments."
Recession
The euro, which had risen following the announcement of the interest rate cut, fell more than a cent against the dollar while Mr Draghi was speaking.
It is the second such rate cut since Mr Draghi took over the ECB presidency last month.
The first rate cut, only days after he took over, reversed the central bank's policy direction. Under his predecessor, Jean-Claude Trichet, the ECB had begun raising rates over the summer to ward off higher inflation.
The moves come ahead of a "do-or-die" Brussels summit of European Union heads to hammer out a deal on how to tackle the eurozone debt crisis, including a potential new treaty.
The second cut has returned rates to the record low 1% level that prevailed from the summer of 2009 to the end of 2010, in response to the global financial crisis and recession.
The two-day EU summit ending is expected to agree tough new rules and automatic fines to ensure that eurozone governments cut their borrowing to below 3% of their GDP.
Mr Draghi confirmed that the decision was not made unanimously. Some German central bankers have expressed opposition to what they see as excessively loose monetary policy.
This week, Standard and Poor's put almost all eurozone countries on "credit watch". It means that six countries with top AAA ratings - including Germany and France - have a 50% chance of seeing their credit ratings downgraded.
The central bank again cut its forecast for economic growth in the eurozone next year, to a range of 1% growth to a 0.4% contraction - raising the prospect of a recession.
New bank aid
The lower forecast may herald further interest rate cuts.
Mr Draghi called again for governments to cut their borrowing, and to boost growth by making their labour markets more flexible, and opening up product markets to more competition.
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However, Mr Draghi dismissed the prospect of a eurozone break-up as "quite far-fetched at this stage".
On inflation, Mr Draghi echoed the line taken by the Bank of England, saying that the rate - currently 3% - would remain above its 2% target for several months, but that the central bank was concerned about the medium-term outlook.
He also praised the efforts of the new Italian government.
Bank support
Mr Draghi also announced further measures to support the eurozone's banks, including:
Mr Draghi also announced further measures to support the eurozone's banks, including:
three-year loans to be available from 21 December
more generous minimum standards for what the ECB will accept as collateral on the loans it makes
a cut in the reserve ratio - the percentage of a bank's assets that must be held in cash at the central bank - from 2% to 1%.
three-year loans to be available from 21 December
more generous minimum standards for what the ECB will accept as collateral on the loans it makes
a cut in the reserve ratio - the percentage of a bank's assets that must be held in cash at the central bank - from 2% to 1%.
The ECB president explained the measures were intended to head off a credit crunch affecting companies and mortgage borrowers.
The ECB president explained the measures were intended to head off a credit crunch affecting companies and mortgage borrowers.
Some banks have increasingly been relying on existing emergency loans from the ECB, as they find it harder to borrow money from markets.
Some banks have increasingly been relying on existing emergency loans from the ECB, as they find it harder to borrow money from markets.
Meanwhile, other, stronger, banks have been depositing more cash with the central bank - a sign that they do not trust lending the money to their peers.
Last week, the ECB joined with the US Federal Reserve, the Bank of England and three other major central banks in announcing an agreement that would ensure that their banks had access to foreign currency emergency loans.
Last week, the ECB joined with the US Federal Reserve, the Bank of England and three other major central banks in announcing an agreement that would ensure that their banks had access to foreign currency emergency loans.
The surprise move sparked speculation that one or more major European banks could be on the point of collapse, because of their inability to borrow in US dollars.
The surprise move sparked speculation that one or more major European banks could be on the point of collapse, because of their inability to borrow in US dollars.
Meanwhile, banks in Greece are facing an accelerating withdrawal of deposits by ordinary citizens worried that the country may soon exit the eurozone.
The central bank again cut its forecast for economic growth in the eurozone next year, to a range of 1% growth to a 0.4% contraction - raising the prospect of a recession.
The ECB has been providing the cash needed by Greek banks to pay out to their fleeing depositors.
The lower forecast may herald further interest rate cuts.
But this has, in turn, put strains on the system of eurozone central banks and has increased the ECB's exposure to potential losses if Greece does ultimately stop paying its debts or leave the eurozone.
It is the second such rate cut since Mr Draghi took over the ECB presidency last month.
Italy plan
The first rate cut, only days after he took over, reversed the central bank's policy direction. Under his predecessor, Jean-Claude Trichet, the ECB had begun raising rates over the summer to ward off higher inflation.
Meanwhile, the two-day EU summit ending on Friday is expected to agree tough new rules and automatic fines to ensure that eurozone governments cut their borrowing to below 3% of their GDP.
The second cut has returned rates to the record low 1% level that prevailed from the summer of 2009 to the end of 2010, in response to the global financial crisis and recession.
Mr Draghi called again for governments to cut their borrowing, and to boost growth by making their labour markets more flexible, and opening up product markets to more competition.
Mr Draghi confirmed that the decision was not made unanimously.
He also praised the efforts of the new Italian government.
The ECB gas been providing some support to Italy and Spain, by buying up their debts in the financial markets to push down the cost of borrowing.
The summit will also seek to boost the eurozone governments' own bailout capacity.
Italy's 10-year cost of borrowing had risen above the 7% level widely deemed to be unsustainably expensive, but fell back below 6% in recent days, in expectation of ECB aid.
Leaders still hope to find a way to double or triple the size of the eurozone governments' bailout fund - the European Financial Stability Facility (EFSF) - from its current 440bn euros (£375bn; $590bn).
Following Mr Draghi's press conference, it rose back above 6%.
However, in recent weeks, financial markets have signalled that they do not view the EFSF as a credible solution to the crisis, because Italy and its debts are seen as simply too big for other eurozone governments to rescue.
Attention has instead turned to the ECB and its potentially unlimited ability to create the euros needed to rescue Italy.
But Mr Draghi put the onus back on the EFSF as the primary means for the eurozone to support crisis-struck governments.
Italy's 10-year cost of borrowing had risen above the 7% level widely deemed to be unsustainably expensive, but fell back below 6% in recent days, in expectation of an ECB bailout.
The ECB gas been providing some support to Italy and Spain, by buying up their debts in the financial markets.
But Mr Draghi played down the prospect that the ECB would ramp up its purchases.
"What we need to see is a dramatic and meaningful U-turn at the ECB," Graham Neilson, chief investment strategist at hedge fund Cairn Capital, told the BBC.
He said that without a commitment by the ECB to provide massive financial support to Italy and other struggling governments, the eurozone would break up.
"The central bank does not have a mandate to do what is necessary to get us off this path."
However, Mr Draghi dismissed the prospect of a eurozone break-up as "quite far-fetched at this stage".
