European Central Bank (ECB) bond purchases will not solve Spain and Italy’s difficulties maintaining investor confidence, ECB Governing Council member Luc Coene said in an interview with De Tijd and L’Echo.
Bond yields have been rising because financial markets do not trust Spanish and Italian authorities to take the measures necessary to repair their economies, Coene said in the interview, published yesterday. As a result, he predicted few benefits from any ECB action.
“It makes no sense for the ECB to start financing those countries,” said Coene, who also heads Belgium’s central bank.
“It would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet. That would in turn weaken the ECB and do nothing to resolve the underlying problems,” he said.
Coene told the newspapers that the central bank’s experience a year ago demonstrates why the ECB should remain reluctant to step in.
“We haven’t forgotten what happened in August of last year: We bought Italian bonds and right after that the Italian government reneged on its pledges,” he said. “The conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.”
Spanish two-year yields climbed on Friday to the highest level in a week amid speculation an ECB plan to buy the debt of so-called peripheral nations won’t be enough to stem the financial crisis.
The market for Spanish and Italian securities improved earlier this month after ECB President Mario Draghi said the Frankfurt-based central bank may buy government debt along with the euro-area bailout funds. The ECB said this week that it may take such measures only if troubled nations commit to improving their economies and fiscal positions.
Coene said the ECB is divided on what conditions should be assigned and not on the overall strategy for when to intervene, according to the newspapers. The ECB will preserve its discretion and not introduce a policy with any sort of automatic action, they cited him as saying.
“Every board member, including the Spanish and Italian ones, knows that our actions will have a short-lived effect” and that market turmoil “will stop only when there’s no more Spanish and Italian bonds in the market,” Coene said. “We all agree specific conditions must be met before we can intervene. About those conditions, the ECB board members do have different opinions from time to time.”
At the same time, the Belgian central banker said it remains in the interest of all 17 euro members to keep the currency union intact. Germany, home to the eurozone’s biggest economy, is willing to assist if other nations take necessary measures, he said.
If Greece were to leave the euro, “it would be the worst solution,” Coene said. “It would raise a question about euro membership for everybody, not only for Greece.”