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UPDATE 2-ECB's Coeure: must be mindful of balance sheet risks

* ECB's outright debt purchasing programme under criticism

Coeure: not negotiating with governments on OMT

* German lawmakers fret about risks to taxpayer from OMT

* ECB policy crucial to stabilising financial markets

By Leika Kihara

OSAKA, Japan, Oct 31 (Reuters) - The European Central Bank must be mindful of the risks posed by assets held on its balance sheet, a senior member of the central bank said on Wednesday, as a plan to buy government debt could expose the central bank to financial losses.

The ECB is not currently in negotiations with any European government to trigger the central bank's debt purchases, Executive Board member Benoit Coeure said, as pressure mounts on Spain to seek a bailout and stem a sovereign debt crisis that has rumbled into its third year.

Coeure's comments come as the ECB has been forced to defend its unconventional policy of buying an unlimited amount of debt from struggling euro zone members.

The decision has played a crucial role in easing global market tensions over Europe's debt crisis, but has raised concerns that the ECB will end up printing money to finance governments and ultimately taxpayers would bear any losses on the debt.

``We have to care about the risk portfolio of our balance sheet,'' Coeure said in a seminar held in Osaka, western Japan.

``We are at a time when the euro area capital markets are very fragmented because of the crisis. This should not last long,'' he said, adding that the ECB will do anything it can in terms of financial infrastructure to unite the region's capital markets.

All three major parties in Spain's parliament will invite ECB chief Mario Draghi to discuss the conditions under which the bond-buying programme, known as outright monetary transactions (OMT), can be implemented, a spokeswoman for Spain's lower house has said.

However, Coeure's comments on Wednesday seemed to dispel any hope that Spain is taking a step to break out of its negative cycle of fiscal spending cuts and economic recession.

``We are not going to negotiate with governments. We're not in any negotiation in the euro area,'' he said, referring to the OMT programme.

``OMTs are outright operations that is part of monetary policy and based on conditionality. Why we need conditionality ... because it's needed for the (programme) to be effective,'' he said.

The ECB head last week gave a robust defence of his bond-buying plan in a two-hour closed-door meeting with sceptical German lawmakers. The plan can only be put in place on the condition that a country requests aid and enacts certain policies.

Debt purchases would stop if a country did not ``respect'' the conditionality of the OMT programme, Coeure warned.

The ECB, which has already agreed to accept a wider range of collateral in lending operations and cut its benchmark interest rate to a record low of 1 percent, is trying to balance the need to stabilise financial markets with the risks that aggressive central bank moves could instill a moral hazard by making some governments more complacent about Europe's crisis.

The ECB will remain ``very vigilant'' to any signs of risks to price stability, but right now the risks are balanced, Coeure said, suggesting the central bank is comfortable with leaving its benchmark rate at 1 percent for the time being.

Coeure also warned against expecting the ECB to loosen collateral standards further, in a message that the central bank thinks it is approaching the limits of its ability to prevent Europe's debt crisis from worsening.

``Anything we can do is to keep the system running and wait for national solutions,'' Coeure said.

``If we don't deliver what is necessary to support the euro as a currency, then it will be a failure as an European project. There is not so much that the ECB can do. ... These are political decisions that must be taken in a democratic framework.''

Coeure was in Osaka to participate in the Sibos conference, a gathering of the world's banking and financial leaders to discuss interbank money settlement systems and financial regulation.