Former European Central Bank policy maker Nout Wellink said Spain can’t realistically expect officials to narrow the bond spread with Germany to as little as 200 basis points, as he predicted “execution problems” with the ECB’s bond program.
If Prime Minister Mariano Rajoy envisages “that the maximum difference with the Germans is 200 basis points, then he makes a mistake,” Wellink, the former Netherlands central bank governor who retired from the post in 2011, said in a Bloomberg Television interview on Nov. 30. “Two hundred basis points seems to me too much” to hope for, he said.
Spain is still resisting asking for aid, a prerequisite to trigger the ECB’s Outright Monetary Transactions program, its new government bond-purchasing program. Rajoy said Nov. 6 that Spain needs to know by how much its borrowing costs would fall if it sought a bailout, signaling he favored a narrowing of the spread to 200 basis points, half the current one.
“As far as I understood it, the ECB wants to deal with the breakup risk of the system and there are other risks also,” said Wellink, who served on the ECB’s Governing Council for more than a decade. “These risks show up in interest-rate differentials.”
Spain’s 10-year bond yield was 5.3 percent at 9:16 a.m. in Frankfurt today. That’s 394 basis points above the German security of a similar maturity.
Financial markets have rallied since the ECB pledged sovereign-bond purchases in August to reduce the financing costs of debt-strapped nations such as Spain and Italy, and safeguard the euro. The program would be run in tandem with Europe’s bailout fund and countries have to agree to overhaul their economies and structural deficits.
While the OMT has been “very instrumental in calming markets,” Wellink said he also “sincerely” hopes it does not need to be activated and envisaged “some execution problems when it comes to using this instrument in practice.”
ECB President Mario Draghi has said the ECB would stop buying immediately if a country reneged on its commitments, and envisages that officials would also not buy bonds as long as the so-called Troika comprising the European Commission, the ECB and the International Monetary Fund are assessing a country’s progress.
“It’s easy to say you stop intervening the moment the Troika lands in the capital but it’s more difficult to forecast whether you can stick to this promise because you don’t know what’s going to happen during that period,” said Wellink, who is the chairman of the Basel Committee on Banking.
There could be other problems that “depend on the circumstances,” he said.
On Greece, Wellink said that last week’s deal easing the terms on emergency aid for the country “is not the end of the story” and “we might need a new program in 2014.”
He also said he doesn’t “exclude” a debt writeoff by the official sector “as a consequence of this package.”
“I see an increased willingness to solve the Greek problem,” Wellink said.
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