4 Min Read
FRANKFURT (Reuters) - The European Central Bank's new bond-buying programme is no substitute for government reforms and belt tightening, ECB policymaker Joerg Asmussen said on Tuesday, keeping the heat on Spain to reform its foundering economy.
The ECB executive board member also highlighted a clause in the bank's statute that says it can also sell the bonds it buys, implying that this could be used to apply pressure on countries to meet the conditions set for its help in holding down borrowing costs.
Asmussen's comments, just five days after the ECB agreed its potentially unlimited bond-buy plan, show the German ECB board member wants to deter Madrid and Rome from thinking they can afford to slow reforms if the ECB intervenes on their behalf in the debt markets.
The ECB has made any buying under its new plan conditional on the country concerned tapping the euro zone rescue fund for aid, which would come with strict conditions - a plan aimed at calming German fears about the ECB's strategy.
European policymakers are now jockeying over the nature of these conditions.
Another ECB board member, Frenchman Benoit Coeure, said on Saturday countries that apply for help will not necessarily be asked to make more cuts.
"The OMT is in no way a substitute for continued efforts in structural reforms and fiscal consolidation on the side of governments," Asmussen said of the ECB's new bond-buying purchases, to be known as Outright Monetary Transactions (OMTs).
"They are essential steps to regain trust and to ensure the sustainability of the euro area in the long run," Asmussen, a member of the ECB's Executive Board, added in a speech at Goethe University in Frankfurt.
Asked later by journalists if the ECB could sell bonds bought under the programme before they mature, he said: "Read article 18 of that statute, the president referred to that article in the press conference very much on purpose."
Article 18 of the ECB statute says the ECB and the national central banks may operate in the financial markets by buying and selling outright in order to achieve its objectives.
Were the ECB to start selling the bonds it bought under its new programme, it could reverse the effect of its initial intervention and drive countries' borrowing costs back up, giving it more power to force countries to reform.
The ECB wants to head off any repetition of what happened when it bought Italian and Spanish bonds last year, only for Italy's then-prime minister, Silvio Berlusconi, to go back just days later on reform promises.
Asmussen said those purchases, made under the Securities Markets Programme (SMP) that the ECB terminated last week, "did not address the incentives for governments to engage in the necessary reforms and to rebalance their public finances."
Spain has already received aid of up to 100 billion euros ($128 billion) from the euro zone to help it shore up its ailing banks and has made clear it could seek a sovereign rescue once euro zone partners and the ECB spell out what strings would be attached.
Last week's agreement on the new bond-buying plan comes after the ECB buoyed euro zone banks by funneling them over 1 trillion euros in lending operations in December and February, and cut interest rates to a record low of 0.75 percent in July.
But there is a limit to crisis measures, said Asmussen.
"Central banks' crisis measures ... ultimately have their limits in terms of effect and legitimacy," he said. "The risk of undermining the primary mandate of central banks needs to be taken into account."
Turning to the issue of banking supervision, Asmussen said European Commission proposals to be published on Wednesday would foresee giving the ECB "an important role."
In terms of the division of labor between the ECB and national supervisors, he said "it will be key to strike the right balance between relying on local know-how and expertise while safeguarding a single standard of supervision and a level playing field."
($1 = 0.7785 euros)
Writing by Paul Carrel; Editing by Ruth Pitchford