European Central Bank Executive Board member Joerg Asmussen said the bank shouldn’t buy government bonds on the secondary market before the region’s rescue fund has started intervening on the primary market.
“In my opinion, the EFSF or the ESM should intervene on the primary market upon the request of a particular country before the ECB steps in,” Asmussen said in a speech in Hamburg today. “But such an application is only a necessary condition for ECB action. The ECB council will continue to decide in full independence whether, when and how it will purchase bonds on the secondary market.”
The comments suggest the ECB wants to see either the European Financial Stability Facility or the permanent European Stability Mechanism physically buying bonds before it makes any purchases of its own. For that to happen, a country must formally apply to the bailout fund for help and agree to conditions set out in a Memorandum of Understanding.
“With this procedure, we can ensure that the respective countries implement all necessary and agreed reform measures,” Asmussen said. The ECB is still working on the details of its bond plan and council members will discuss it at their next meeting on Sept. 6, he said.
ECB President Mario Draghi on Aug. 2 announced that the central bank may resume bond purchases if distressed governments ask for aid from the bailout funds. So far, neither Spain nor Italy have made a request.
Asmussen said the ECB will strictly separate monetary policy from its future role as a supra-national bank supervisor, including staff. While the ECB needs to ensure the independence of its monetary policy, it is open to stronger parliamentary control when it comes to supervision, he said.
“The ECB must be equipped with all instruments needed to effectively fulfill its banking supervisory tasks,” Asmussen said. “That means access to all necessary information” and “the right to close non-viable banks,” he said. “Without this minimum set of tools, the ECB won’t take any responsibility; the risk for the reputation of the institution would be too high.”