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April 11, 2012 6:01 pm
The European Central Bank could again intervene in bond markets to try to rectify “unjustified” concern over Spain’s fiscal position, a senior official said.
The suggestion by Benoît Coeuré, an ECB executive board member, of possible market intervention, helped to ease tension over Spain’s debt on Wednesday and push down the country’s implied cost of borrowing. However the comments could spark renewed disagreement within the central bank over one of its most controversial crisis-fighting tools.
In the past two years the ECB has bought bonds issued by eurozone governments to try to support demand for the debt and drive down yields, which move in the opposite direction to bond prices.
But the bond-buying – known as the ECB’s securities markets programme – has been all but dormant since January, with some influential policymakers sceptical of its effectiveness and others openly hostile to the implied central bank support for eurozone governments.
Mario Draghi, ECB president, has since December preferred to focus on a €1tn injection of three-year loans into the eurozone banking system as the central bank’s main crisis-fighting measure.
Speaking in Paris on Wednesday, Mr Coeuré said market conditions faced by Spain were not justified. “Will the ECB intervene? We have an instrument, the securities markets programme, which hasn’t been used recently but it still exists,” he said.
The comments helped to support Spanish government debt. Yields on 10-year bonds – reflecting borrowing costs for the government – dropped back to 5.87 per cent, having briefly risen above 6 per cent on Tuesday for the first time this year.
Marco Valli, chief eurozone economist at UniCredit, said: “My feeling is that current bond yields are not sufficiently high for the ECB to step in to support Spain and Italy now.”
A resumption of bond-buying would probably be controversial, he said. “Some of the hawks may argue that some political decisions in Spain and Italy contributed to increase investors’ concerns. And with €1tn of three-year liquidity in the system, the ECB has already acted boldly on non-standard measures and now the ball is in the governments’ court.”
Mr Coeuré said Spain’s new government had taken “very strong deficit measures” and was showing “enormous” political will. “What is happening at the moment in the market does not reflect the fundamentals,” he said.
The comments reflect the stance taken by the ECB in starting the bond-buying programme in May 2010. Jean-Claude Trichet, Mr Draghi’s predecessor, justified the measure as a way of correcting market dislocations that were hampering the central bank’s conduct of monetary policy. All of the bonds have been bought on secondary markets rather than directly from governments. The ECB holds €214bn in eurozone government bonds.
However German policymakers, in particular, saw the programme as tantamount to central bank financing for governments – which the ECB is prohibited from providing. Axel Weber, the former Bundesbank president, resigned partly out of opposition to the measure. Jens Weidmann, his successor at the Bundesbank, has also opposed bond purchases.
ECB board members including Mr Coeuré continue to press for governments to use the time bought by the recent liquidity. “What markets are saying is that they are asking these governments to deliver,” Mr Draghi said last week.
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