ECB leaves benchmark rate unchanged

[June 06, 2012]  FRANKFURT, Germany (AP) -- The European Central Bank has left its benchmark interest rate unchanged as it increases the pressure on eurozone governments to tackle the debt crisis that threatens the global economy.

The decision Wednesday by the bank's 23-member governing council left the refinancing rate at a record low 1 percent.

The bank is under pressure to stimulate a weakening eurozone economy with a rate cut. But bank President Mario Draghi has said the central bank cannot make up for inaction by governments.

Draghi told European politicians in Brussels last week that the euro's basic setup is "unsustainable" and urged them to sketch out a long-term vision for strengthening the framework of the shared currency.

While it tries to squeeze more effort from government, the ECB is facing a weakening economy in the 17 countries that use the euro. Surveys of economic activity and business confidence have pointed sharply down, suggesting that the mild contraction of 0.3 percent predicted by the European Commission will turn out to be worse. That would argue for lower interest rates that would in theory make borrowing cheaper for businesses so they could expand and hire.

The ECB has already taken strong action to stimulate credit and borrowing by cutting rates to record lows and loaning (EURO)1 trillion in emergency credit to banks. Yet borrowing has not picked up, the banks says, because businesses see no prospect of growth and profit.

European leaders including Draghi are working on proposals ahead of a crucial June 28-29 summit where leaders from across Europe will be under pressure to stop the 17-country eurozone from falling apart.

Eurozone leaders face trouble on several fronts. Spain is struggling to bail out banks that made reckless loans during a real estate boom and are now suffering mounting losses. Greece, already rescued by expensive bailout loans from the other countries, faces elections June 17 that could result in rejection of the strict cutbacks demanded under its bailout. That could lead to a chaotic exit from the euro.

Trouble in one place could spread to other countries in the form of investors selling assets and bank customers withdrawing deposits for fear banks will collapse or their savings will be redenominated in a new currency after euro exit. Finance ministers from the Western industrial countries held a conference call Tuesday to discuss the eurozone crisis.

A renewed financial crisis in Europe could hurt growth in the United States and Asia by creating losses and fear among banks, which are key to the functioning of the global economy, and by hurting trade.

The measures to be discussed at the summit at the end of June could include: a Europe-wide bank regulator and bailout fund with powers to take over and restructure banks, further steps to increase growth, moves toward more control over national government's spending and some form of shared borrowing to reduce the chance that one country would default.

Most of those steps would take years to implement and several are highly controversial. Germany has resisted common borrowing through so-called eurobonds, afraid spendthrift countries would overborrow using its stronger credit rating. A plan for stronger control of countries finances might ease that objection, however.

Officials from the European Union's executive, the Commission, unveiled their legislative proposals earlier Wednesday designed to strengthen the eurozone's ability to restructure troubled banks. However Wednesday's proposals, not expected to come into power until 2018, fall short of the full banking union pushed for by some European officials.

[Associated Press; By DAVID McHUGH]

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