Draghi Presents ECB Plan to Avert Credit Crunch

European Central Bank President Mario Draghi coupled an interest rate cut with a pledge to offer banks unlimited cash for three years as officials try to head off a looming recession and leaders meet in Brussels to hammer out a solution to the debt crisis.
The Frankfurt-based ECB cut its benchmark rate by a quarter percentage point to 1 percent, matching a record low. It introduced new three-year loans for banks and loosened the collateral criteria it imposes when lending by making credit claims such as bank loans eligible and reducing the rating threshold on asset-backed securities.
The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi told reporters in Frankfurt today after chairing a meeting of the ECB’s Governing Council.
The decisions highlight how the central bank is focused on reviving bank lending rather than increasing its government bond purchases to defeat the sovereign debt crisis. Europe’s leaders begin talks in Brussels today to craft another solution for the turmoil, a week after Draghi pushed them to deliver a “fiscal compact” he hinted the ECB may be willing to help support in financial markets.
The ECB also cut banks’ reserve ratios to 1 percent from 2 percent and will stop fine tuning operations at the end of each reserve maintenance period, Draghi said. The 36-month loans will be conducted as a fixed rate with full allotment, Draghi said.

Summit

European Union chiefs will meet for dinner at 7.30 p.m. to devise a fifth “comprehensive” solution in 19 months for a crisis which has left Germany and France, the euro’s lynchpins, facing the threat of losing their AAA rating from Standard & Poor’s.
French President Nicolas Sarkozy and German Chancellor Angela Merkel are proposing to amend European treaties to tighten controls on budgets. Still, Germany rejects proposals to combine the region’s current and permanent rescue funds, a German government official told reporters in Berlin yesterday on condition of anonymity.
Even so, leaders may agree to provide 150 billion euros ($201 billion) in loans, via the national central banks, through the International Monetary Fund, opening a new financial pipeline to fight the debt crisis, a European Union diplomat said.

-- With assistance from Jeff Black and Rainer Buergin in Frankfurt and Kristian Siedenburg in Vienna. Editors: John Fraher