European Central Bank Executive Board member Benoit Coeure said that while the ECB stands ready to activate its government bond purchasing program, the central bank can’t fix the causes of Europe’s debt crisis.
“Let me confirm that the ECB is ready to undertake” purchases under its Outright Monetary Transaction program, once a country “has successfully” applied to Europe’s rescue fund for aid, Coeure said in a speech in Hong Kong today. The objective would be to “remove tail risk to reduce catastrophic risks from sovereign bond markets,” he said.
At the same time, he cautioned that “the ECB can address the symptoms but not the root causes of financial-market fragmentation.”
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 ECB expects Spain to trigger the bond program, officials have said, and Coeure’s colleague Ardo Hansson noted this week that the OMT may have tipped the balance in favor of Europe beating the crisis.
Coeure said the “cures” to nurse the euro area back to health are solvent sovereigns, making banks more resilient, introducing “appropriate” macro-prudential instruments and breaking the link between creditworthiness of banks and sovereigns.
European leaders in June agreed to hand the ECB powers to oversee all 6,000 euro-area banks from Jan. 1 as part of a so-called banking union that would unlock joint recapitalization funds for the region’s ailing lenders. Germany’s Bundesbank has raised concerns about whether the ECB’s new role will compromise its ability to control inflation, and there have also been calls for the ECB to supervise only the biggest banks.
Coeure said “all banks” should be covered by the new supervisor “so as to have a level playing field and to support further integration of the industry.”
While a single banking overseer is “necessary” for the euro area, it may also be “desirable for other European countries as well,” Coeure said.
He also pressed European leaders to establish a “single resolution mechanism” for failed banks “as soon as possible in 2013.”
On global regulation, the policy maker, who joined the ECB’s executive board in January, said he was concerned that “there is a risk that weak economic growth and an increasing focus on domestic policies priorities can weaken the incentives and appetite for coordinated reform efforts.”