Reasons Why the European Central Bank (ECB) Should Keep the Interest Rates Low in Order to Help Greece Institution’ Name Name of Institution Introduction According to Stein (2011) Greece’s economy was the strongest and fastest developing in the European zone…
The state made efforts to keep the economy going by spending a lot which consequently increased the country’s debt level in the eurozone. Further efforts were made to reduce the impact of the economic crisis where the Greek State borrowed a loan of €45 billion on 23 April, 2010 from the European Union and the IMF. This was in attempt to cater for its financial requirements for the remaining period of 2010. Their efforts were futile as standard and Poor’s cut the country’s debt rating to junk status a few days after acquiring the loan. The move was in fear of a possible default by the country where the investors were likely to lose 30-50% of their savings. As a result the securities market in the world and the entire euro currency went dipped low in reaction to the S & P downgrade (Stein, 2006). Below is an explanation as to why the European Central Bank must keep the level of interests low with the intention of rescuing Greece. Justification as to why the interest rates must be kept low to help Greece The lowering of the interest rates will give some relief to Greece particularly with its delicate Southern tier. The banks in Greece will eventually borrow heavily from the European Central Bank since the bank will find it difficult to hold more cash in the central bank when borrowing is low. Lending in the private markets will also increase which will enable the households and business free up their cash for more expenditure and investment that can improve the economy of the country. The interest rates of the loans are closely pegged on the formal policy rate hence in one quarter point European Central Bank decrease will eventually reflect into €2.5 billion less yearly payment of interests as approximated by economists (Stein, 2011). Efforts have been by the eurozone monetary policy through the European central bank to help in rescuing Greece which has been coordinated by several actions. This is in response to the escalating threat of the world’s economy as a result of the crisis in Greece. First and foremost, the European Central Bank made a cut on the interest rates to a record low of 0.75%. This was an urgent move to counter the extreme run of the economic information. However, this has driven the strong shift in recuperating the State’s bond purchase policies or flooding banks with a long lasting liquidity term (Bartha, 2011). According to Butler (2010), the European Central Bank is also anticipated to make a further cut with more measures to enable the Greece economy to come back to its feet. Consequently, the Bank of England whose lending rates are currently hitting low of 0.5% has intentions of rejuvenating its printing procedures and purchasing of US$ 78 billion of its assets. This is in line with its freshly established monetary guidelines to assist in lifting the eurozone out of downturn. The reaction by the European Central Bank to ease the market tension has been implemented through cutting of borrowing costs for debts by 25 basis units. The interests’ rate record low of 0.75% has the main purpose of promoting the declining eurozone economy. The justification for this move was instigated by the increased pressure on European Central Bank by the investors and other stakeholders such as the IMF to take bolder steps in countering the economic downturn. Hence the European Central Bank had to buy back most of the sovereign debt securities for Greece distressed economy. Besides, the cuts and the ...
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