Stocks drop as ECB cuts interest rates

Euro Zone: Markets veer sharply as the European Central Bank cuts interest rates, then slashes its growth forecasts for 2012 as a crucial eurozone summit approaches.

WMarkets veer sharply as the European Central Bank cuts interest rates, then slashes its growth forecasts for 2012 as a crucial eurozone summit approaches. REUTERS/Ralph Orlowski

Stock markets across Europe plummeted yesterday after the European Central Bank (ECB) cut interest rates and extended a lifeline to struggling euro-zone lenders, before slashing growth forecasts and warning that leaders must act to tackle looming debt.

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European equities spiked before Mario Draghi, the ECB's president, began to speak at a press conference in Frankfurt to announce a cut in interest rates to 1 per cent.

But the announcement of a lifeline to struggling euro-zone lenders had no sooner left his lips than markets sank like a stone. The leaders of France and Germany compounded matters as they warned that urgent measures were needed to save the 17-nation currency union.

In a press conference in Frankfurt, Mr Draghi said the ECB would adopt "non-standard" measures to aid banks, including offering free three-year loans and reducing restrictions on the assets that banks can hold as collateral.

Meanwhile, at a conference taking place at the same time in Marseille, Nicolas Sarkozy, the French president, warned that Europe was "in danger" and that France and Germany must work together to find a solution and restore confidence.

"We need more solidarity in the euro zone and more discipline," he said. "If we don't have an agreement on Friday, there'll be no second chance."

Angela Merkel, Germany's chancellor, said that there was no "big-bang" solution to the euro zone's crisis and that a resolution would require years of hard work.

The easing of rates comes as the EU begins a summit today where leaders will announce policy measures intended to stave off a collapse in confidence in the euro.

European equities plunged as the ECB slashed economic growth estimates for next year to 0.3 per cent from 1.3 per cent.

The FTSE 100 fell 0.1 per cent to 5,537.16 and Germany's DAX Index slumped 1.2 per cent to 5,919.90, while France's CAC 40 fell 1 per cent to 3,142.02. The euro fell 0.4 per cent to reach US$1.3332.

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The rate cut, the second in as many months by the ECB, reversed increases made under the bank's previous president, Jean-Claude Trichet.

The ECB moved to head off a growing "collateral crunch" among European lenders. The ECB also cut banks' reserve ratios, the minimum quantities of deposits that banks must hold, to 1 per cent from 2 per cent.

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