UPDATE 1-Coeure: ECB will not bow to market pressure - paper


(Adds comments in pars 2-4 on recession, inflation)

* Says risk of deflation greater than inflation * But ECB's priority is price stability over growth * Says ECB will only buy bonds if its conditions met

FRANKFURT, Oct 12 (Reuters) - The European Central Bank willnot cave in to market pressure and buy bonds of euro zonegovernments whose borrowing costs have reached unsustainablelevels if the country does not comply to the ECB's rules,Executive Board member Benoit Coeure said.

In an interview with German daily Die Welt, Coeure also saidthe 17-country euro zone was flirting with recession.

"The economies of several euro zone countries arecontracting at the moment, and the euro zone as a whole iscurrently not far from a recession," he said. "Consequently, therisk of deflation is greater than the risk of inflation."

"But if the central bank Council must choose between moreinflation or less growth, then price stability would always havepriority."

The ECB impressed markets last month by launching a new andpotentially unlimited bond purchase programme under which itwill buy governments' short-term bonds once they have signed upto a European bailout programme.

Coeure doused hopes that the ECB would intervene regardlessof whether its conditions were met once a country's borrowingcosts soared.

"We will not cave in, but only intervene once our conditionshave been met. We will prove it to you," Coeure said, addingthat the bank would only buy bonds if the International MonetaryFund was involved, even if only to monitor the programme.

The ECB tied its bond-market intervention to reformcommitments to make its new programme more effective and tosoothe concerns raised by Germany's Bundesbank that the ECB wastaking on too much risk and getting too close to the taboo offinancing governments.

Coeure said Bundesbank President Jens Weidmann was right toraise such concerns, but added that doing nothing was not anoption.

"The environment has changed a lot over the past years. Thechallenge for the ECB is to adapt its monetary policy to the newcircumstances and to still stay within tradition of theBundesbank," Coeure said.


IMF Managing Director Christine Lagarde on Thursday saidthat struggling European countries such as Greece should begiven more time to reduce their budget gaps.

Coeure, however, stressed that the ECB would not help Greecebeyond providing solvent banks with liquidity in return forsufficient collateral.

"It has to be clear that the central bank will not financegovernments via the printing press, neither direct nor indirect.This means: If further emergency loans to banks are purely forbuying government bonds, then the ECB Council should not approveit," Coeure said.

Coeure also said the plan for a new European bankingsupervision under the roof of the ECB could be implemented stepby step as long as the legal framework was in place from thebeginning of next year.

ECB President Mario Draghi and Germany's markets regulatorcautioned earlier this week that setting up a new system ofsupervision would take up to the end of next year, later thanmany expected and a potential setback to efforts to helpdistressed euro zone countries and their banks.

"We should be pragmatic about it. The highest priority isthat the supervision works. If more time is needed, then weshould take that time," Coeure said.

While it was "very important" for the ECB's preparationsthat the new supervisory structure was legally in place asplanned from January 2013, the actual supervisory work could bemoved across to the ECB step by step later, Coeure added.

(Reporting by Eva Kuehnen; Editing by Michael Roddy)


Keywords: ECB/COEURE