Even before the market had time to digest it, the effect of the European Central Bank’s (ECB) anticipated 0.25 percent benchmark rate reduction last Thursday seems to have evaporated; with the looming war in Iraq, uncertainty is swamping the markets, overwhelming them with the weight of the crisis. «Europe is entering a recession, the euro is gaining dangerously against the dollar and the ECB responds with a timid and ineffectual move,» a senior Greek banker commented. «We expected a distinctly larger cut, at least half a percentage point; in the present circumstances, this would have been the only means of defense.» He said the slender reduction, leaving ECB’s basic rate at 2.5 percent, did not create any pressure on Greek banks, most of which did not intend to follow suit with rate cuts themselves. Those that did would announce very slim ones or ones under 0.25 percent. The National Bank of Greece (NBG) is considered likely to announce small adjustments to deposit and lending rates today, perhaps in selected financial products as well. Sources say these will be in the region of 0.10-0.20 percent, although most banks would like to follow Alpha Bank’s recent example and raise, rather than cut, rates. Senior bank officials argue that Greek lending rates are currently much lower than the eurozone average – a result of the very strong competition between banks last year. «We will probably wait for the ECB’s next next move before we adjust our rates,» said one such official at a private sector bank. Fortunately for depositors, the potential for cuts in savings rates appears even more limited after the inflation rate rocketed to 4.3 percent in February, sending the real returns on savings accounts further into negative territory. The only sector likely to benefit is that of corporate loans based on euribor, which is automatically adjusted. Curiously, it is perhaps the only sector where banks are given larger leeway to rationalize rates by increasing the margin they have for euribor. Greek banks dare not make such moves, but their bigger European peers do, despite charging more for large corporate loans before the ECB’s cut. The unwillingness of Greek banks to follow suit on the ECB’s move is also linked to other factors. With the exception of business loans, where timidity is mainly dictated by economic difficulties and the lack of liquidity which would be highly likely to lead to an increase in the number of non-performing loans, maintaining rates where they are in other loan categories is bound to improve banks’ profit margins. But overall, banks seem to be less concerned with the effect of small rate hikes or cuts on profitability than with deteriorating fiscal conditions in the eurozone, particularly as a result of the rise in inflation, accentuating fears of the repercussions which war will have. This swamps any optimistic prospects in «a sea of uncertainty which monetary policy is unable to solve,» said ECB President Wim Duisenberg in support of ECB’s «lukewarm» decision.