European Central Bank Executive Board member Benoit Coeure triggered speculation that the bank will revive its bond-purchase program to lower Spain’s borrowing costs as the region’s debt crisis threatens to boil over again.
Spanish “market conditions are not justified,” Coeure, who heads the ECB’s market operations division, said at an event in Paris today. “Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists.”
The euro rose and Spanish bond yields declined as Coeure’s comments reassured investors that the ECB will act again if needed to stem the crisis. With Spain’s three-month-old government struggling to reduce the budget deficit and crack down on overspending by regional administrations, borrowing costs have surged, nearing the levels that precipitated bailouts for Greece, Portugal and Ireland.
“We expect a very significant intensification of the euro-area debt crisis to materialize this quarter as the market refocuses on the fundamentals and the fiscal challenges of each country,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. “The ECB should be preparing itself” for “the return of significant financial market tensions.”
The yield on Spanish 10-year bonds, which climbed to a four-month high of 5.99 percent this morning, slid to 5.82 percent after Coeure spoke. The euro gained more than a quarter of a cent to $1.3134 at 2 p.m. in Frankfurt and European stocks rose, with the Stoxx Europe 600 Index up 1 percent.
Spain’s 10-year borrowing costs have jumped more than 1 percentage point since March 2, when Prime Minister Mariano Rajoy said the country will miss a 2012 deficit goal approved by the European Union. The euro area’s fourth largest economy is in recession and unemployment is nearing 24 percent.
Rajoy said today that Spain won’t need a bailout and will regain investors’ trust with the deepest austerity measures in three decades, including spending cuts and tax increases.
“They lend to you if they are confident you will pay it back,” he told his governing People’s Party in Madrid. “There are countries near to us that couldn’t and they are in the situation everyone knows about. This is not the case for Spain.”
Coeure said it will take time for the government’s “very strong deficit measures” to take effect and praised the “enormous” political will to implement reforms.
Chorus of Optimism
He joined a chorus of positive comments about Spain from policy makers around Europe today.
The Spanish government has undertaken a “comprehensive reform” of its finances, labor market and banking system, German Finance Ministry spokesman Johannes Blankenheim said. French government spokeswoman Valerie Pecresse said market concern over Spain is “excessive.”
Spain may “aggressively” tap support from the ECB instead of seeking a bailout, said Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management in London. The ECB may revive its bond-purchase program around Spain, he added.
The ECB “should be a little more aggressive” with its bond purchases, Banco Santander SA Chief Executive Officer Alfredo Saenz said yesterday.
Dormant Bond Program
The ECB hasn’t purchased any government bonds for four weeks after its injection of more than 1 trillion euros ($1.3 trillion) of three-year loans into the banking system helped debt markets rally.
Some ECB policy makers oppose the bond program, which was started in May 2010 to stem the spread of the sovereign debt crisis, arguing it blurs the line between fiscal and monetary policy.
“It’s interesting that Coeure does not mention another three-year tender, but sees a possible restart of the SMP,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “I think reviving the peripheral bond-buying program could face some resistance, especially by northern European governors who see it as too ‘political’ an instrument.”
Still, the loans don’t have the ability to target individual market segments in the same way the bond program does, said Michala Marcussen, global chief economist at Societe Generale in Paris.
“If you’re looking to target specific dislocation, and the Spanish government is making all the right noises, that’s the most efficient tool in the box,” she said.