Greece casts shadow as ECB gauges strength of recovery

Jun 2, 2015, 8:25 AM
FILE – This is a Tuesday, Feb. 24, 2015 file photo of President of European Central Bank Mari...
FILE - This is a Tuesday, Feb. 24, 2015 file photo of President of European Central Bank Mario Draghi as he stands next to a facsimile of the new 20 euro banknote in Frankfurt, Germany. More and more, Europe's economy is showing signs of life. Now if only this Greek thing would clear up. That, in a nutshell, is the situation European Central Bank head Mario Draghi faces as the bank's top officials head into their meeting Wednesday June 3, 2015.(AP Photo/Michael Probst, File)
(AP Photo/Michael Probst, File)

FRANKFURT, Germany (AP) — More and more, Europe’s economy is showing signs of life. Now if only this Greek thing would clear up.

That, in a nutshell, is the situation European Central Bank head Mario Draghi faces as the bank’s top officials head into their meeting Wednesday.

Talks aimed at unlocking more bailout money for Greece have dragged on, even as Athens runs dangerously short of money and faces a possible default that could disrupt markets and lead to a messy departure from the 19-country euro.

Greece faces four repayments to the International Monetary Fund in June, starting with just over 300 million euros due Friday. Its left-wing government has rejected the creditors’ demands for more cutbacks, arguing they have made the economy worse — and the debts harder to pay.

The country’s crisis will be a key topic at the meeting of the ECB, which is otherwise expected to raise its forecasts for growth and inflation for the rest of the eurozone as its stimulus program takes effect.

Here’s what to look out for in Draghi’s news conference after the ECB’s meeting.

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GREECE IS THE WORD

The ECB has been helping keep Greece afloat as talks on the country’s bailout continue, so it has a stake in the future of the negotiations.

It supports the country by allowing the central bank of Greece, part of the ECB’s network of central banks, to provide emergency credit to Greek lenders.

Withdrawing that support could cause the banks to collapse — but continuing or increasing it exposes the Greek central bank to possible losses.

On Wednesday, Draghi is likely to call on Greece to agree with creditors for a deal as soon as possible to limit the financial risks for all involved.

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INFLATION FORECAST MAY RISE

The chance of an implosion in Greece is overshadowing an otherwise improving economic outlook.

Growth came in at 0.4 percent in the first quarter in the 19-country shared euro currency union, for which the ECB sets monetary policy. More significantly, inflation rose to 0.3 percent in May from 0.0 percent in April, the first positive reading in six months. That eases concerns about a long-term bout of falling prices, called deflation, that can hurt an economy for years.

The improvements suggest the ECB’s 1.1 trillion euro ($1.2 trillion) bond-buying stimulus program may be having an impact.

Given that, the ECB staff may raise their inflation forecast for this year to 0.3 percent from zero previously.

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A FULL DOSE OF STIMULUS

Even if the forecasts are raised, Draghi will likely keep a slightly downbeat tone about the recovery. That’s to keep markets from thinking the improving outlook might lead the ECB to scale back its monthly injections of 60 billion euros in newly printed euros through bond purchases.

He’ll emphasize that those improved forecasts assume the ECB will carry out the full amount through Sept. 2016.

___

RATES UNCHANGED

Although this is an interest-rate meeting, the ECB has said it has cut rates as far as it can. The benchmark rate at which it lends to banks is at 0.05 percent. And the rate it pays to banks on their deposits is negative 0.2 percent.

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Greece casts shadow as ECB gauges strength of recovery