The scale of the market pressure on Spain is not justified given the reforms being undertaken by its government and the European Central Bank (ECB) bond-buying program, ECB executive board member Benoit Coeure said yesterday.
Markets are watching closely for any signs that a rise in Spanish bond yields back above 6 percent could prompt a change in the bank’s rhetoric after policymakers in recent weeks underlined it was now up to governments to deal with the crisis, not the bank.
Coeure, the board member in charge of market operations, said the central bank still had the Securities Market Programme (SMP) in place which allowed it to purchase the debt of eurozone nations, should the need arise.
“We are seeing today growing signs of normalization on a whole group of market segments ... but the situation in recent days shows that this normalization remains fragile,” Coeure told a conference in Paris.
Referring to Spain, where sovereign debt yields have spiked amid concerns over the government’s ability to cut its deficit, Coeure said: “The political will is there, which makes me think that what is happening at the moment in the market does not reflect the fundamentals.”
“There is no reason why the situation does not normalize in Spain as well,” he said. “We have an instrument for intervention, the SMP, which has not been used recently but which exists.”
His comments appeared to open the door to the ECB reactivating its bond-buying program — a policy option which would meet strong resistance from the Bundesbank and other ECB policy-makers from the eurozone’s healthier “core” economies.
The ECB left the program unused for the seventh time in eight weeks last week.
However, Coeure said that the ECB’s three-year liquidity operations (LTRO) in December last year and February had helped normalize market conditions, which banks and governments should take advantage of to press ahead with reform.
“Banks need to reach their capital adequacy targets, improve their funding profiles and restart lending,” he said.
On the basis of central bank definitions, there was about 800 billion euros (US$1.051 trillion) of excess liquidity in the euro system, but weak levels of aggregate demand meant this did not represent an inflationary risk in the short term, he said.
Should growth recover, banks would gradually exit the LTRO mechanism, decreasing excess liquidity, The ECB also has a number of tools at its disposal, including unused instruments such as certificates of deposit, to mop up excess money supply if required, he added.
Coeure said that the crisis had led to a fragmentation of capital markets, as savings went increasingly to domestic debt markets rather than crossing national borders, hampering the efficient working of the single market.
He called for a “financial compact,” similar to the fiscal compact signed recently by 25 EU leaders, to unfreeze the capital flows between member states.