A market expert from the European Central Bank (ECB) has warned it might have to mop up some Spanish government debt. It would be a non-standard move taken against the backdrop of unjustifiably high bond yields.
Following several weeks of relative calm in the eurozone, the sovereign debt crisis returned with a vengeance this week. Stock markets took a dive, and bond yields in Spain jumped as doubts over that country's ability to control its finances lingered on.
The European Central Bank, however, believes that the scale of market pressure on Spain is not justified in the light of reforms being undertaken by the government in Madrid. ECB Executive Board Member Benoit Coeure told a conference in Paris on Wednesday that the bank still had its bond-buying program as an option.
"The political will in Spain is there for all to see, which makes me think that what is happening in the market at the moment does not reflect the fundamentals," said Coeure who is in charge of market operations.
He said he was worried about yields on Spanish government bonds having jumped to over six percent again, which might eventually prompt the ECB to mop up some eurozone debt - and Spanish debt in particular.
Intervention around the corner?
"We have an instrument for intervention which has not been used recently, but which exists," Coeure commented. He added, though, that there was no reason whatsoever to believe that the situation could not normalize in Spain over the next couple of weeks.
Coeure defended the ECB's large-scale three-year liquidity operations which had provided ultra-cheap loans to struggling European banks. He said the non-standard measure was needed to stabilize markets and increase confidence among lenders.
The ECB said there was some 800 billion euros ($1.05 trillion) of excess liquidity in the eurozone. It said the debt crisis had led to a fragmentation of capital markets, as financial resources went increasingly to domestic debt markets, rather than crossing national borders, hampering the efficient working of the single currency area.
hg/gb (Reuters, AFP)