Bailout Fund Should Buy Euro Debt

A top European Central Bank policy maker has publicly backed the rapid use of the euro zone’s bailout fund to buy distressed sovereign bonds on the open market, saying such action could ease the “very severe strain” being felt by Spain and Italy.

A Euro sign sculpture stands in front of the European Central Bank's (ECB) headquarters.
A Euro sign sculpture stands in front of the European Central Bank's (ECB) headquarters.

Speaking to the Financial Times, Benoît Cœuré, the ECB executive board member who oversees financial market operations, also said a cut in interest rates was likely to be discussed at next month’s ECB rate-setting meeting, to help boost confidence. But he stressed that political agreement on fiscal integration was needed to tackle the euro zone’s underlying problems.

Mr Cœuré expressed surprise that no government had yet asked the European Financial Stability Facility, the euro zone’s 440 billion euros rescue fund, to buy sovereign bonds to drive down borrowing costs.

“Certainly it’s a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility,” Mr Cœuré said on Wednesday.

At a summit of the Group of 20 leading economies in Mexico on Monday, Mario Monti, Italy’s prime minister, raised the possibility of using the EFSF to buy bonds. Angela Merkel, Germany’s chancellor, however, failed to endorse the idea.

At a press conference in Berlin on Wednesday, Ms Merkel dismissed talk of using the rescue funds to buy Spanish or Italian government bonds as “a purely theoretical discussion”.

She scotched speculation about any imminent action, saying that such a move was “not at the moment under discussion”.

In Greece, the three political parties committed to implementing the internationally-backed bail-out program formed a coalition government on Wednesday led by Antonis Samaras, leader of the centre-right New Democracy party, which narrowly won first place in Sunday’s re-run elections.

But attention in the euro zone crisis has shifted back to the bigger economies of Spain and Italy. Spain’s borrowing costs have hit euro-era highs in the past week while the yield on Italy’s benchmark 10-year debt is also elevated.

Under EFSF rules, the ECB must be consulted before the fund buys sovereign bonds. Mr Cœuré said the bank would be likely to back such a move because the borrowing costs were not a reflection of economic fundamentals but rather “the anxiety of market participants as regards the course of political decisions to be taken, in particular in Spain to fix the banking problem”.

“Current circumstances would probably warrant EFSF intervention in the secondary market – provided that this happens against the right background of political decisions and solutions to the underlying issues and strong conditionality.”

However, Mr Cœuré ruled out using the ECB’s own bond-buying program , called the securities markets program, since it was “not an instrument that can be used to fix fiscal difficulties or to help insolvent banks.”

Mr Cœuré said cutting the ECB’s main interest rate from 1 percent was “certainly an option” and he expected it to be discussed at the next governing council meeting on July 5.

“As regards the current crisis, it [a rate cut] could perhaps help to some extent, but, like all we do at the current juncture, it would certainly not fix the fundamental problems,” he said. “We are now in the third year of the European crisis and are coming to a point where some of the short-term fixes have been tested and exhausted and deeper questions are being asked.”