JOUY-EN-JOSAS, France – Countries should have to make formal requests and agree to strict conditions before the European Central Bank buys their bonds to drive down their borrowing costs, a top bank official said Friday.
The ECB is expected to unveil next week details of its plans to purchase debt on the open market to push down the interest rates eurozone governments pay to borrow money. Italy and Spain — who are struggling to manage their debt in a recession — are expected to be among those helped.
The rise in borrowing costs for those two countries — which have the third and fourth largest economies in the eurozone — has intensified uncertainty on the continent and even made some wonder if the 17-country euro can survive.
Benoit Coeure acknowledged that the euro is facing tremendous challenges, but said they were surmountable.
"The biggest fear for the euro is the lack of confidence in the euro," he told business leaders at a meeting outside Paris. "The integrity of the euro is under threat."
The ECB's plan to intervene in bond markets would be one key step toward helping countries manage their borrowing costs.
But Coeure said he would prefer that the ECB only provide assistance after countries had asked for support from Europe's bailout funds. Many countries have been squeamish to make such a move because it would come with conditions attached — such as policy and reform measures — that would impinge on the government's budget decision-making.
Coeure is responsible for the ECB's market operations as a member of its six-member executive board, which runs the bank day to day, and therefore would be closely involved in planning and carrying out any bond purchases.
Demanding that a government formally ask for help before enjoying the support of the ECB is seen as crucial to making the plan work — the ECB ran into trouble enforcing conditions with its earlier bond purchase program aimed at helping lower rates for Spain and Italy.
In August, 2010, then ECB President Jean-Claude Trichet detailed the ECB's expectations in a letter to then-Prime Minister Silvio Berlusconi shortly before the bank launched a round of bond purchases. After bond yields fell, Berlusconi began backing off some of his reform proposals. The ECB eased off its support and the bond purchases did not decisively lower Italy's borrowing costs.
Top ECB official Joerg Asmussen said last week that "the mistake with Italy last summer, when the ECB bought Italian government bonds and the time was not used for the needed adjustment measures, must not be repeated."
Enforcing conditions is in principle difficult for central banks because they are supposed to stay out of government budget planning and remain independent. The ECB's proposed solution is to have conditions agreed as part of the application for help to the eurozone bailout fund.
Another potential argument against bond purchases is that they might cause consumer goods' prices to rise by increasing the supply of money in the economy.
Coeure dismissed that argument, noting inflation expectations remain "well anchored."
The ECB has already flooded banks with €1 trillion in emergency loans, and growth in the money supply still remains weak. The inflation rate in the eurozone has been edging down steadily during the crisis as is now at 2.4 percent, just above the 2 percent target.