Extra support measures ECB can take before situation worsens
THE European Central Bank is under intense political pressure to buy as much eurozone debt as it takes to bring the region's crisis back under control. The bank itself, however, has shown no sign so far that it is prepared to yield to the demands.
Below is a list of additional support measures it could put in place before it gets to the point where it feels it has no option other than to ramp up its bond purchases.
ULTRA LONG-TERM LOANS FOR BANKS
The ECB's reflex response in times of trouble is to jet-hose liquidity at the banking system. According to eurozone central bank sources it is currently considering extending the length of the loans it offers banks to as long as three years.
This would be an unprecedented move and a clear signal of support by the ECB. In addition, it could hold more operations where banks can borrow for one year or six months and promise to keep such sessions on offer for a lengthy period of time.
Its dollar-denominated loans could also be extended or made more attractive by adjusting the terms and the pricing.
FIX THE PRICE OF ITS LOANS
The bank could revert to offering its longer-term loans at a flat, fixed rate, rather than its current approach of a rate that tracks any headline ECB rate hikes or cuts.
In mid-2009, the fixed-rate approach spurred banks to take a whopping €447bn in one-year loans which drove down the cost of borrowing on the open bank-to-bank market to just over 0.3pc.
The eurozone's deterioration since then makes another such frenzy unlikely but fixing the interest rate could certainly boost demand significantly and push down borrowing costs again.
FURTHER RELAX ITS LENDING RULES
The ECB could relax its lending rules in a variety of ways to make it easier for banks to get access to its funding.
It could go back to allowing them to swap their dollar, sterling and yen-denominated assets for ECB loans. It did so between mid-October 2008 and the end of 2009, and doing it again would be a boost for those running short of euro-denominated collateral. The first time around it added an extra charge of 8pc for using non-euro assets. A more general broadening of the types of assets it accepts as collateral is another option.
INTEREST RATE CUTS
Markets expect the ECB to continue cutting interest rates. Previously, it only went as low as 1pc with its main rate and 0.25pc with the rate that banks get if they deposit overnight at the ECB.
The intensity of the crisis could soften resistance to going below 1pc. JP Morgan has predicted the bank will go as low at 0.5pc with its main rate and 0.25 with its overnight deposit rate.
Other money-market experts say it could even cut the deposit rate to zero, which would mean that banks get nothing if they hoard cash at the ECB.
This could help encourage those with spare money to overcome their reluctance to lend to peers.
BANK DEBT PURCHASES
The ECB has the ability to buy bank bonds and other bank-issued securities. If it wanted to, it could make such purchases in tandem with its more controversial purchases of sovereign debt as part of its 'Securities Markets Programme'.
A concerted spell of buying could ease the funding pressure that banks are under but is likely to provoke complaints from politicians and the public.
FUND A CRISIS-FOCUSED IMF VEHICLE
While the ECB itself could not do so, the 17 national eurozone central banks could effectively print money to put into an IMF-controlled fund designed to help tackle the debt crisis.
Sources told Reuters earlier this month that policymakers were exploring the possibility.
This is the sole scenario under which the EU treaty allows central banks to pass money to governments.
Eurozone central banks have provided funding in such a way on two previous occasions.
The first was for the IMF's Poverty Reduction and Growth Facility and the second was its Heavily Indebted Poor Countries Initiative.
LEND TO THE EFSF
Were the eurozone bailout fund to be given a banking licence, there is nothing to stop it borrowing money at the ECB's mainstream lending operations and using to money to help out troubled countries. (Reuters)