European Central Bank Vice President Vitor Constancio said sustained bond purchases by the central bank would only delay the fiscal adjustments that euro-area governments need to make.
“The secondary market purchases are not, and cannot be used to circumvent the principle of budgetary discipline as a pillar of Economic and Monetary Union,” Constancio said at an event in Frankfurt last night, according to a text of his speech published by the ECB. “Sustained buying of government paper by the central bank would only postpone problems and delay the necessary fiscal adjustments, ultimately resulting in a build-up of inflationary pressures.”
The comments underscore the ECB’s reluctance to continue buying the bonds of distressed euro-area governments to contain a sovereign debt crisis that’s now threatening to engulf Italy and Spain. It was forced to re-start the purchases last month after governments failed to convince investors they can solve the crisis which, according to a research paper published by the ECB yesterday, is putting the survival of the euro at risk. ECB Executive Board member Juergen Stark, a co-author of that paper, resigned this month to protest the bond purchases.
International Monetary Fund Managing Director Christine Lagarde said the ECB must continue to provide “solid, reliable” funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis.
The ECB “plays and can play and I hope will continue to play a critical role,” Lagarde said in a Bloomberg Television interview with Tom Keene yesterday.
Constancio said an intensification of turbulence in financial markets “is leading to very high interest rates in some countries, to potentially damaging volatility, and to very low trading volumes in some government bond markets that at times cease to function appropriately.”
He said the tensions are “in some respects” more broad-based than those seen in May last year, when Greece’s fiscal meltdown prompted the ECB to enter bond markets for the first time. “It is clear that sovereign debt challenges in individual euro-area countries -- no matter their size -- can undermine the stability of the euro area as a whole,” Constancio said.
The ECB argues that its bond purchases are aimed solely at ensuring the transmission of its monetary policy. Stark has said they also blur the line between monetary and fiscal policy by reducing borrowing costs for governments with big debts.
Constancio said the relative size of the ECB’s bond- purchase program makes it “easier to implement.” The ECB’s purchases amount to “just 1.6 percent” of euro-area gross domestic product, against 13.7 percent of GDP for the Bank of England and the 11.4 percent for the Federal Reserve, he said.
“The ECB continues to comply strictly to its mandate to ensure price stability and does not allow inflation to increase as a way of easing the burden of the debt,” Constancio said.
He said a full and timely implementation of the measures agreed upon by heads of state at a July 21 summit is “crucial” to combat the crisis.
The ECB has also stepped up its provision of liquidity to euro-area banks to prevent a credit crunch as institutions become more wary of lending to each other.
“The total value of marketable securities already presented and approved for Eurosystem credit operations amounts to 1.7 trillion euros and our counterparties have at their disposal almost 4 trillion euros out of the overall total of existing eligible securities of about 14 trillion euros,” Constancio said. “This confirms that there is no liquidity or collateral shortage for the euro-area banking system.”