Reuters: Market News: UPDATE 2-ECB's Coeure says bond-buys still an option as Spain hurts

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UPDATE 2-ECB's Coeure says bond-buys still an option as Spain hurts Apr 11th 2012, 11:19 Wed Apr 11, 2012 7:19am EDT * Bond-buy programme still exists -board member Coeure * Says markets treating Spain unfairly * Asmussen reiterates "ECB has done its part", onus on govts By Daniel Flynn and Leigh Thomas PARIS, April 11 (Reuters) - The scale of market pressure on Spain is not justified given the reforms being undertaken by its government and the European Central Bank still has its bond-buying programme as an option, ECB Executive Board member Benoit Coeure said on Wednesday. Markets are watching closely for any signs that a rise in Spanish bond yields back above 6 percent may prompt a change in ECB rhetoric after policymakers in recent weeks stressed it was now up to governments to deal with the crisis, not the bank. Coeure, the ECB board member in charge of market operations, said the central bank still had the Securities Market Programme (SMP) in place allowing it to purchase debt of euro zone nations, should the need arise. "Will the ECB intervene? We have an instrument for intervention, the SMP, which has not been used recently but which exists," he told a conference in Paris. Any reactivation of the bond-buying programme would meet strong resistance from the Bundesbank and other ECB policymakers from the euro zone's healthier "core" economies. Another ECB Executive Board member, German Joerg Asmussen, reiterated that the onus was now on governments and not the central bank to act. "The ECB has done its part," Asmussen said in an advance release of an interview to run in Italian weekly Il Mondo on Friday. "The ball is in the court of the governments." The ECB left the bond-buying programme unused for the seventh time in eight weeks last week. Coeure noted that market confidence - crucial to the dynamics of the euro zone debt crisis - is shaky. "We are seeing today growing signs of normalisation on a whole group of market segments ... but the situation in recent days shows that this normalisation remains fragile," he said. 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 normalise in Spain as well." In Berlin, the Finance Ministry said it regretted that the "huge efforts" Spain was making to reform its economy were not recognised by financial markets. France's government spokeswoman said Paris considers fears about Spain's economy are overblown. NO INFLATION RISK Coeure said that the ECB's three-year liquidity operations (LTRO) in December and February had helped normalise 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. He said that, by central bank definitions, there was some 800 billion euros of excess liquidity in the euro system, but that weak levels of aggregate demand meant this did not represent an inflationary risk in the short term. Hard-liners at the ECB are concerned that the 1 trillion euros the ECB unleashed into the financial system with its twin LTROs could fuel inflation pressures. Euro zone inflation eased to 2.6 percent in March - above the ECB target of just below 2 percent and higher than expected. But a weak economic picture means that even though inflation has proved to be sticky, the ECB is not about to tighten policy. The bank had to reverse two interest rate rises last year as the crisis came back with a vengeance and will be careful not to repeat the mistake of abandoning its low-rate policy too soon. It is also taking care not to signal an exit from the funding measures too early. Coeure said that should growth recover, banks would gradually exit the LTRO mechanism, decreasing excess liquidity. The ECB also had a number of tools at its disposal, including unused instruments such as certificates of deposit, to mop up excess money supply if required. Coeure noted 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 of the bloc. Link this Share this Digg this Email Reprints

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