* 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 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 should 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 also considers fears about Spain's economy are
NO INFLATION RISK
Coeure said that the ECB's three-year low-interest loan
operations (LTROs) in December and February had helped stabilise
market conditions and banks and governments should take
advantage of this to press ahead with reform.
"Banks need to reach their capital adequacy targets, improve
their funding profiles and restart lending," he said.
"G overnments need to press ahead with their existing efforts to
reestablish healthy finances and support long-term growth. At
the ECB, we will continue to follow both their progress
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.
Coeure, however, noted that once the simultaneous expiry of
other forms of ECB financing were taken into account, the net
provision of liquidity was actually 521 billion euros.
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.
Th e rate on the LTRO varies in line with ECB's rates, Coeure
noted, and so would likely rise as the economy picked up steam.
The ECB also had a number of tools at its disposal,
including bank reserve requirements and unused instruments such
as certificates of deposit, to mop up excess money supply if
required. Jus t raising reserve requirements to their 2 percent
level in 2011 would remove 100 billion euros of liquidity, he
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, including by
creating a single payments system for euro zone companies and a
single resolution regime for insolvent banks.