ECB trims rates, but markets pound 'timid' response

The European Central Bank cut interest rates to a new record low on Thursday, but markets punished what they deemed to be a timid response to the eurozone crisis as Greece warned its recovery was off track. The ECB, at its regular monthly policy meeting, trimmed eurozone borrowing costs by a quarter of a percentage point to 0.75 percent, in a widely anticipated move. Shortly beforehand, the Bank of England announced it was keeping its main interest rate at a record low 0.50 percent and said it would increase its Quantitative Easing (QE) stimulus policy by £50 billion ($78 billion, 62 billion euros) to boost Britain's recession-hit economy. Both decisions had already been priced in by the financial markets, so with no more additional measures forthcoming, stock markets and the euro sagged in response. The gloom only deepened when new Greek Finance Minister Yiannis Stournaras admitted that the country's recovery plan was "off-track" in some areas and that "difficult years" lay ahead for the crisis-hit eurozone member. Frankfurt's DAX 30 index slipped 0.45 percent, Paris's CAC 40 gave up 1.17 percent, Milan's FTSE MIB dropped 2.03 percent and Madrid's Ibex 35 index plummeted 2.99 percent. London's benchmark FTSE 100 managed a 0.17 percent gain, however. On the bond markets, Italy's 10-year bond yield climbed back above 6.0 percent after it had been below that level since last week's EU summit when leaders took steps to confront the crisis. And the yield on Spanish 10-year bonds also rose, while the European single currency plunged to $1.2372 from $1.2527 late Thursday in New York. Markets were clearly disappointed when ECB president Mario Draghi said the bank's decision-making governing council "didn't discuss any other non-standard measures" to combat the crisis. While a rate cut had been seen as a done deal, markets had been hoping the bank might revive its long-dormant programme of indirectly buying up the bonds of debt-mired countries -- known as the Securities Markets Programme (SMP). Another option would have been to launch a third long-term refinancing operations or LTRO after two previous ones in December and February amounting to more than 1.0 trillion euros ($1.26 trillion). But Draghi poured cold water on such hopes. "We didn't discuss any other non-standard measures," he said. "We still have our artillery ready. We still have all our tools to pursue our objectives within our mandate," Draghi insisted, but he refused to elaborate further on what other possible non-standard measures the ECB was considering. The size and complexity of the LTROs were such that it was not possible to assess exactly what effects they have had so far, Draghi said. The aim of the LTROs was to avert a looming credit crunch, because the ECB hoped banks would lend the cheap funds to businesses and households and keep credit flowing in the debt-wracked eurozone economy. However, the cash does not appear to be trickling through into the real economy, recent data suggest, with lending by eurozone banks to the private sector actually contracting in May. Berenberg Bank chief economist Holger Schmieding slammed the ECB rate cut as too timid and would leave the eurozone vulnerable to renewed financial turmoil. "Are we heading for a stormy summer?" he asked. "The ECB cut interest rates ... but refused to do anything else to address the eurozone confidence crisis. The ECB neither announced new liquidity initiative nor dropped any hint that it may intervene again in sovereign bond markets to break the cycle of fear that is engulfing Spain and Italy," Schmieding complained. Commerzbank economist Joerg Kraemer also believed the rate cut "will not help the eurozone economy." But he believed the ECB was nevertheless "determined ... to use all of its weapons" and that the it would undertake "further easing of collateral rules and probably new long-term tenders if the crisis were to escalate again in the months ahead." GFT analyst David Morrison argued that "investors had built their hopes up too high" ahead of the ECB and BoE meetings "and there are growing concerns that the apparent consensus reached at last week's EU summit is not as game-changing as first thought." Julian Callow at Barclays Research said "there is now little left for the ECB to do in terms of lowering interest rates. Therefore, if the economy does not turn around during the second half, the governing council will have to address the case for outright large scale asset purchases." In a positive note, Ireland successfully borrowed money on capital markets for the first time for two years, raising 500 million euros in three-month bills in a vital step in its fight to recover from a debt rescue.