ECB’s Coeure Says Money Markets Have Begun to Re-Integrate

European Central Bank Executive Board member Benoit Coeure said financial markets in the euro area are beginning to function properly again.

“The ECB has been successful in easing market tensions using standard and non-standard tools,” Coeure said in a speech in Luxembourg today. Still, market re-integration “will succeed only if it is supported by continued efforts by governments to bridge fiscal and competitiveness imbalances.”

Since the Frankfurt-based ECB pledged last year to buy government bonds if countries sign up to reform programs, confidence in the single currency has returned. ECB President Mario Draghi said last week that while financial market fragmentation is being repaired, it may take time for the euro-area economy to recover from a three-year debt crisis that’s seen at least five of its 17 countries request bailouts.

“The underlying structural problems which relate to uncertainty about risk, whether in the form of counterparty, credit, liquidity or redenomination risk, need to be solved,” Coeure said.

Interbank Rates

Following scandals over the fixing of money-market rates such as the London interbank offered rate, a long-term overhaul in how such rates are calculated may be needed, Coeure said.

“In the short term, governance reforms and increased supervisory and regulatory scrutiny can help to restore the market’s confidence in the integrity of the benchmarks and to ensure their continuous viability,” he said.

The ECB is also “closely following” the falling number of participants in panels that set the European inter-bank rates Eonia and Euribor, he said. Eonia is the euro overnight index average, and Euribor is a three-month loan rate reported by all banks.

“Given the authorities’ commitment to addressing the shortcomings revealed in the rate-setting process, it is in the interest of markets that banks remain in the panel while the regulatory framework is being amended and behave as responsible market participants, thus preventing potential disruption in the functioning of an important financial market segment,” Coeure said.

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