Europe's battle to come to grips with the region's growing debt turmoil reached a critical stage Wednesday as the sense of economic gloom in the region deepened.
While the European Central Bank (ECB) declared it was ready to act
in the face of what it called "increased downside risks" facing the
17-member eurozone economy, Brussels unveiled a new set of banking
rules.
"We monitor all developments closely and we stand ready to act,"
ECB President Mario Draghi told a press conference, after an ECB
warning on the fragile state of the eurozone economy raised the
prospect of the bank cutting interest rates in the coming months.
Draghi was speaking after the bank's 23-head governing council
left interest rates on hold at an historic low of 1 per cent, despite
renewed turmoil in the currency bloc, which now threatens to engulf
Cyprus.
The ECB meeting in Frankfurt and the European Commission's
announcement on shifting the onus for bank bailouts from taxpayers to
banks came against the backdrop of a growing crisis in Spain, as
Madrid struggled to deal with its ailing banking sector.
"It's true that there are tensions, but the road (ahead) is about
perseverance, determination and European solidarity," said EU Economy
Commissioner Olli Rehn's spokesman Amadeu Altafaj, echoing remarks by
other key European officials, including Draghi.
Altafaj also said the Cypriot authorities were addressing the
risks facing the nation "in a decisive manner." Cyprus is heavily
exposed to Greece's troubled economy.
He went on to say the European Commission expected to have
"clarity on the state of the Spanish banking sector" by the end of
this month, when it receives a report by independent auditors.
Having that information was an "indispensable condition" for any
recapitalization talks, he said.
But the Brussels plan to shelter taxpayers from the risk of again
having to fork out billions for failing banks will not fully kick in
before 2018, according to proposals presented Wednesday by the bloc's
executive.
The European Commission called for so-called bail-in procedures
that would give national regulators the power to fire managers, force
losses on shareholders and creditors and order the breakup and sale
of a failing bank.
"We no longer want situations in which governments find themselves
with their backs to the wall, with no other option than to inject
public money to avoid (financial) catastrophes," EU Market Regulation
Commissioner Michel Barnier told reporters.
But figures released Wednesday by Spain's national statistics
institute underlined the scale of the problems facing the eurozone's
fourth-biggest economy, with production plunging by 8.3 per cent in
April compared with the same month last year.
This represents the biggest slump in output in recession-hit Spain
since October 2009 and comes against the backdrop of attempts by
Madrid to slash a high deficit through big budget cuts.
The release of the data also followed a dramatic move by Spanish
Prime Minister Mariano Rajoy Tuesday to increase pressure on Madrid's
European partners and the ECB to help the country deal with its
banking crisis.
Rajoy told the nation's parliament that Spain's situation was
extremely difficulty and that Europe needed to help with liquidity
issues.
Further underscoring the uncertainties surrounding the eurozone
economy, data released by the region's biggest economy, Germany,
showed industrial production slumping by a more-than-forecast 2.2 per
cent in April.
The United States and Britain also stepped up pressure on the
Europeans Wednesday, with both Washington and London calling for an
"immediate plan" to resolve the eurozone crisis.
Meanwhile, the rating agency Moody's Investors said the risks
unleashed by the eurozone debt crisis had led it to cut the credit
ratings for six German and Austrian lenders.
The eurozone received a modicum of good news Wednesday when
Portugal was rewarded for its tough austerity drive with an
oversubscribed bonds sale, according to the national debt agency.
But with large parts of the eurozone mired in recession, the
European Commission said it did not expect the currency bloc to grow
during the first three months of the year, after it contracted by 0.3
per cent in the final quarter of 2011.
