By Ambrose Evans-Pritchard

LONDON, England - February 23, 2009 - For months the ECB held sternly to the high ground of orthodoxy as the U.S., Japanese, British, Canadian, Swiss and Swedish central banks slashed rates towards zero and embraced quantitative easing, but a confluence of fast-moving events is now forcing it to move.

The credit default swaps that measure bankruptcy risk on the debts of Ireland, Austria and a clutch of Latin Bloc states have vaulted to dangerous levels. In the case of Ireland, the slump is spilling on to the streets. Some 120,000 marched through Dublin over the weekend to protest austerity measures.

The slow fuse on Eastern Europe's banking crisis has detonated, leaving Austrian, Belgian, Italian and other West European banks with 1.5 trillion USD (£1 trillion) in exposure.

It is happening just as industrial output collapses in the eurozone's core states. Germany's economy contracted at 8.4 percent annualized in the fourth quarter. ECB president Jean-Claude Trichet said on Monday that "a process of negative feedback" has set in, where the banks and the real economy are pulling each other down in a self-reinforcing spiral. Eurozone credit is contracting. Banks are rationing credit as deleveraging gathers pace.

Rob Carnell, global strategist at ING, said the ECB has been painfully slow to acknowledge the global deflation tsunami sweeping across Europe.

"It seems divorced from reality. It is clearly nonsense to talk about inflation now: it has been negative on average for six months. The eurozone purchasing managers' index has fallen twice as fast as in the U.S., so the ECB should be acting even faster than the Federal Reserve," he said.