The European Central Bank resisted market pressure to ride to the rescue of struggling euro zone countries on Thursday, giving verbal support to Greece's tough savings plan but stopping short of any fresh action.
The ECB kept benchmark interest rates at a record low of 1 percent for the 12th month in a row and ignored calls for extra cash injections or the use of its 'nuclear option' -- a purchase of Greek and possibly other countries' government bonds to halt the debt crisis that is threatening the euro's survival.
President Jean-Claude Trichet said the bank's policymakers did not even discuss the prospect of buying government bonds at their Lisbon meeting, despite intense market speculation.
Financial markets showed their disappointment, with the euro plunging to a fresh 14-month low against the dollar and the premium investors demand to hold Portuguese and Spanish government bonds flaring to record highs.
Mr. Trichet is going for the 'crisis, what crisis?' approach, said Gary Jenkins from Evolution Securities. I am not convinced that this denial of the problems facing European sovereigns is healthy.
Still, economists said it was possible the ECB would do a U-turn on bond purchases in the future if other countries are also engulfed by a lack of market confidence in their ability to service debt, noting Trichet did not rule out such a move.
Trichet said the ECB remained permanently alert and was able to take appropriate decisions, even if they were unconventional, without wavering from its price stability goal.
We will never, never put in jeopardy the anchoring of inflation expectations and the delivery of price stability which is our major asset, he said.
CALL FOR THRIFT
Flanked by outgoing Vice-President Lucas Papademos and his replacement Vitor Constancio, currently head of the Portuguese central bank, Trichet said Spain and Portugal were not in the same boat as Greece.
Stressing that calls for fiscal thrift and bold structural reforms applied to all euro-zone countries, he reiterated the ECB's backing for Greece's savings plans and dismissed the prospect of any euro zone member defaulting on debt.
Default is, for me, out of the question, he said.
In a speech at Lisbon's Universidade Nova, Trichet hit out at speculators who take out contracts to insure against default without owning the bond in question, saying the mutation of arbitrage into speculation should be reversed.
The cost of insuring Portuguese debt against default has hit record highs in recent days and Constancio said Portugal could not afford to ignore market signals, urging his government to consider new savings measures.
Trichet said this week's decision to scrap collateral rating requirements on Greek debt -- which some policymakers had opposed -- was an acknowledgement of the extent of the country's economic recovery program.
Asked if the ECB would do the same for other euro zone members, he said the decision was made for Greece alone.
He gave no indication the bank planned to roll back its progressive unwinding of stimulus measures for the banking sector by adding longer maturities to its liquidity operations.
Non-conventional measures remained in place for one-week and one-month operations and as far as three-month lending was concerned, it was not the bank's intention to push rates above 1 percent, Trichet said.
GROWTH AMID UNCERTAINTY
The ECB said it expected the euro zone economy to grow at a moderate pace this year, though growth could be uneven in an environment of high uncertainty, and said global inflation pressures were on the rise.
Trichet noted recent survey data had been encouraging.
We had a number of ... data that were quite encouraging ... in the most recent period of time, he said, adding that he remained prudent.
Rising global inflationary pressures were not yet threatening price stability in the euro zone, where domestic price pressures remain low, Trichet said.
However, commodity prices and areas seeing rapid growth were pushing up global inflation trends.
Risks to price stability over the medium term are viewed as still remaining broadly balanced, he said of the euro zone.
He also confirmed that the ECB sees rates as appropriate, implying no change is to be expected in the near future.
(Additional reporting by Shrikesh Laxmidas; Writing by Sakari Suoninen and Krista Hughes; editing by Ian Jones)