ECB holds rates, refuses to show hand on Greece

The European Central Bank held interest rates at a record low on Thursday, seeing tentative signs of economic stabilization, but refused to say what part it might play in averting a ruinous Greek default.

After days of delay, Greek political leaders clinched a deal on austerity measures needed to secure a bailout to keep the country afloat.

ECB President Mario Draghi said Greek Prime Minister Lucas Papademos had confirmed to him that the Greek parties had endorsed a deal, as demanded by their European Union and International Monetary Fund lenders, after days of delay.

A few minutes ago I got a call from the prime minister of Greece saying that an agreement has been reached and has been endorsed by the major parties, Draghi told a news conference after the ECB left its main interest rate on hold at 1.0 percent.

I'm sorry to say I cannot say anything about how our holdings of Greek bonds ... will be treated, he said.

Draghi will attend a meeting of euro zone finance ministers later on Thursday to discuss a 130 billion euros Greek bailout.

Athens has urged the ECB to hand back profits on its Greek bond holdings, a move which could raise 12 billion euros or more to help fill a gap in its financing needs. As of Wednesday, the ECB's 23-member Governing Council had yet to agree a position.

While the ECB has ruled out joining private creditors in voluntarily accepting a reduction in Greek bonds' value, it could send Athens, via a roundabout route, the profits from bonds it bought at below face value.

Some ECB policymakers are reluctant for the bank to show a willingness to share in the restructuring burden for fear of easing the pressure on Athens to agree spending cuts. The ECB is also prisoner to the Maastricht Treaty, which forbids the central bank from financing governments.

The question is whether ECB independence has a price tag. said ING economist Carsten Brzeski. I think that the ECB taking a loss is out of the question - I'm looking for this to be confirmed, and maybe opening the door to eventually not taking a profit.

The euro moved higher against the dollar after Draghi confirmed that Greece had clinched a deal for emergency aid. It was last up 0.2 percent at $1.3284, not far from a two-month high above $1.33 hit earlier. Safe haven German government bonds fell for the same reason.

GREEN SHOOTS?

Since the beginning of the year, some business surveys have instilled hope that the worst of the sovereign debt crisis has blown over and the euro zone economy is perking up.

Draghi said they were only fledgling signs, suggesting rates could yet fall below 1.0 percent, into uncharted territory.

Available survey indicators confirm some tentative signs of stabilization in economic activity at (a) low level around the turn of the year. But the economic outlook remains subject to high uncertainty and downside risks, he said.

A Reuters poll of economists conducted before Thursday's policy decision showed 41 of 71 respondents expected the ECB would cut by its March meeting.

Some other analysts say that as the March 8 meeting comes soon after the ECB's second three-year liquidity operation on February 29, the bank will want to wait longer than that before moving rates, which it has not previously cut below 1.0 percent.

The central bank funneled banks 489 billion euros at a first three-year ultra-cheap loan operation in December, and will repeat the offer in three weeks.

Draghi noted expert opinion expected a similar take-up this month. He recently said the December operation had averted a major credit crunch.

Francesco Papadia, a top ECB official, said on Wednesday bank liquidity concerns had all but disappeared thanks to the ECB's December three-year loans, adding that he was tempted to declare 'mission accomplished'.

(Additional reporting by Paul Carrel, Sakari Suoninen, Marc Jones, Clare Kane, Anna Willard, Jeremy Gaunt and Patricke Graham. Writing by Mike Peacock.)