Paris: European Central Bank bond purchases won’t 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 don’t trust Spanish and Italian authorities to take the measures necessary to repair their economies, Coene said in the interview, published today in the two Belgian newspapers. 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 was quoted as saying.
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 was quoted as saying. “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 yesterday 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.
Government Debt
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 was quoted as saying. “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.”
Currency Union
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 euro zone’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 was quoted as saying. “It would raise a question about euro membership for everybody, not only for Greece.”
In Belgium, the government’s budget deficit will miss the 2012 target and exceed the European Union’s ceiling of 3 percent of gross domestic product as the economy slides into a recession, Coene said.
Belgium’s economy will probably shrink this year, pushing the budget deficit “slightly above” 3 percent of GDP, Coene was cited as saying. Following a 0.6 percent economic contraction in the second quarter, the remainder of the year will likely be “more negative than positive,” Coene said.
Economic Growth
Coene urged Prime Minister Elio Di Rupo’s government to cut spending, saying expenditure growth that is outpacing economic growth is one of the key structural weaknesses of Belgian public finances. Belgium should be “very careful” not to get caught up in the turmoil of the debt crisis again, Coene was quoted as saying.
Rising oil prices haven’t affected the inflation outlook or monetary policy for the euro area, Coene said. There has been no evidence of so-called second-round effects whereby higher crude prices are passed through to other parts of the economy, he said.
“Until now, from all that we have seen in the past, there haven’t been any second-round effects,” Coene was quoted as saying. “So the fact that oil prices are rising right now, which is astonishing by the way because global demand isn’t, does not immediately affect inflation expectations or our monetary policy.”