Analysts at Royal Bank of Scotland are among those who now believe that the European Central Bank will make a U-turn on monetary policy next month, cutting its benchmark interest rate less than three months after raising it.
A cut would be an embarrassing reversal, reminiscent of a similar about-face by the bank on the eve of the financial crisis in 2008.
But the E.C.B. governing council is likely to be concerned about “an acceleration in the deterioration in financial market conditions which we believe risks snowballing into a much more severe crisis,” R.B.S. economists wrote in a note to clients Friday.
Declines in French business and consumer confidence, according to surveys published Friday, reinforced the perception that Europe was slipping toward a downturn before output in many countries has fully recovered from the last downturn in 2009.
“The latest round of cyclical indicators suggests the euro area economy is close to recession,” Sofia Rehman, an analyst at Credit Suisse, wrote in a note.
The euro, which had held up remarkably well during much of the crisis, has plunged 10 cents against the dollar since the end of August, to $1.34. Markets appear to have already priced in the effect of an E.C.B. rate cut when the governing council holds its next meeting, on Oct. 6.
Many of Europe’s key crisis managers, including Jean-Claude Trichet, the president of the E.C.B., are in Washington this weekend for the annual meetings of the International Monetary Fund and World Bank. The gathering of finance ministers and central bank chiefs has fueled expectations that the leaders might agree to concerted action to prop up the euro area.
Late Thursday, the world’s major economies released an unexpected joint statement intended to calm nervous investors.
“We are committed to supporting growth, implementing credible fiscal consolidation plans, and ensuring strong sustainable growth,” said the communiqué from the Group of 20 nations. “This will require a collective and bold action plan with everyone doing their part.”
But some analysts warned against expecting much more than soothing words from the meetings in Washington.
While countries have a common interest in containing the European crisis, their interests diverge on issues like exchange rates. They would all prefer to have weaker currencies as a way of increasing exports at each others’ expense, Karen Ward, an analyst at HSBC, wrote in a note to clients.
“Quite simply this is a beggar-thy-neighbor, not a coordinated world,” she wrote.
Slovenia, a member of the euro area, provided the latest example of how the sovereign debt crisis was creating problems for European banks. The ratings agency Moody’s downgraded bonds issued by the country of two million people by one notch and said further downgrades were under review.
Moody’s said the downgrade was prompted by the likelihood that the Slovenian government would have to support the nation’s banks, which like banks elsewhere in the euro area are having trouble raising money.
“The ongoing financial crisis has exposed significant vulnerabilities in the solvency and short-term external funding and overall business model of the Slovenian financial sector,” Moody’s said Friday.
Mutual mistrust among banks about each others’ exposure to a Greek default is making them reluctant to lend to each other. At the same time, European banks have all but given up trying to raise money by issuing their own bonds, another key funding channel. Bond issuance by European banks since the beginning of July is down 85 percent compared with the period last year, according to Dealogic, a data provider in London.
With a default by Greece on its debt considered inevitable by many economists, attention has turned to whether European banks could absorb the shock. But European authorities denied a report in The Financial Times that regulators were planning to require weaker banks to shore up their reserves more quickly than had been planned.
“There is no acceleration in the calendar that the European Banking Authority gave the banks,” said Olivier Bailly, spokesman for the European Commission. “There is no acceleration on the part of the E.B.A. or on the part of the commission.”
Mr. Bailly said that stress tests this year had identified eight European banks that need to be recapitalized by the end of the year. These must present their proposals to do so to the E.B.A. by Oct. 15, he said.
A further 16 banks, which passed the stress tests narrowly, have until April 2012 to increase their reserves.
Mr. Bailly said that the banks could raise money on the financial markets or turn to their national governments. When changes to the euro zone’s €440 billion, or $595 billion, bailout fund are ratified, he added, it could become a source for bank recapitalization.
In Athens, government officials denied reports that Evangelos Venizelos, the Greek finance minister, had presented members of Parliament with three ways to resolve the debt crisis, including a default that would pay bondholders just half the face value of Greek debt.
Mr. Venizelos lashed out at “discussions, rumors, comments and scenarios that distract attention from” the country’s efforts to cut spending and improve economic growth.
“Greece takes hard and tough measures in order to achieve its fiscal targets,” Mr. Venizelos said in a statement.
But with some members of Mr. Venizelos’s party balking and Greek citizens demonstrating and striking to protest tax increases and other austerity measures, economists doubt that the country can avoid default.
“Greece is going down,” Carl B. Weinberg, chief economist at High Frequency Economics, wrote in his daily memo on the global economy. “Some days it feels as though the end of the world is knocking at the door.”
Stephen Castle in Brussels, Niki Kitsantonis in Athens and Binyamin Appelbaum in Washington contributed reporting.
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