Rates on Hold in Europe, EC Proposes Bank Recovery Plan

Devan Biswas
06 Jun, 2012
New York City

European markets advanced after the central bank held its key lending rate at 1% and announced more liquidity measures and highlighted downside economic risks. The estimate of GDP growth in the March quarter in the euro zone was held flat. German production declined 2.2% in March.

[R]3:50 PM Frankfurt – European markets advanced after the central bank held its key lending rate at 1% and announced more liquidity measures and highlighted downside economic risks. The estimate of GDP growth in the March quarter in the euro zone was held flat. German production declined 2.2% in March.[/R]

European markets traded mixed after the European Central Bank left its key lending rate on hold at 1% and did not announce any new measures to stimulate the economy.

The benchmark rate was held for the sixth month in a row after the newly appointed President Mario Draghi offered new liquidity measures at the end of last year.

The rate on the marginal lending facility was maintained at 1.75%, while the deposit facility rate was kept at 0.25%.

In trading in the region, the FTSE 100 index gained 1% or 54 to 5,314, the DAX index advanced 48.4 or 0.8% to 6,018 and the CAC 40 index increased 35.3 or 1.2% to 3,021.

The euro held steady at $1.255 after the rate announcement and Draghi said in his prepared remarks that inflation is expected to stay above 2% for the rest of the year.

The remarks noted the liquidity operations for the rest of the ear and highlighted economic weakness and noted “economic growth in the euro area remains weak, with heightened uncertainty weighing on confidence and sentiment, giving rise to increased downside risks to the economic outlook.”

At the news conference after the decision, Draghi noted the slow recovery in the economy and said inflation is likely to stay near the target in the medium term but exceed the target in the long term.

He also noted that decisions by European leaders to work towards deeper economic union were “a highly important step” and also noted in “several countries in the euro area excessive imbalances exist and need to be corrected.”

The European Commission announced its bank recovery and resolution plan that is expected to be voted by the European Parliament as early as this summer and may be enforced beginning 2014 with a four year transition.

The new proposal aims to shift the burden of future bank bailout to shareholders and demands that banking industry set asides capital that may be tapped to save failing banks before turning to governments.

The euro-zone economy stagnated in the first quarter, revised data from Eurostat showed today. The gross domestic product remained flat compared to the previous quarter after shrinking 0.3% in the fourth quarter of 2011. This matched the preliminary estimate released on May 15.

Moody''s Investors Service downgraded six German banking groups and one German subsidiary of a foreign group by one notch, and confirmed the ratings for one group. The agency also downgraded the ratings of three major Austrian banks.

Stock movers

Royal Ahold NV fell 4.5% to 9.14 euros after the grocery retailer said first quarter net income declined to 282 million euros from 291 euros a year ago quarter.

Diageo Plc gained more than 2% after the liquor maker said it plans to expand its whisky production and invest one billion pound.

Energy and resources linked companies advanced after commodities staged a rebound after two weeks of decline.

Premier Oil soared 7% to 352 pence after UK based energy explorer said it found oil at a well controlled in partnership with Cairn Energy in the North Sea. Cairn gained 5%.

Kazakhmys Plc rose more than 5% to 699 pence and Vedanta Resources gained 6.7% to 943 pence, in London trading.