ECB's Knot says no new help for Spain bonds soon

The Netherlands representative on the European Central Bank's governing council, said Friday that he doesn't see any need for the ECB to engage in buying up Spanish bonds or launch a third program of low-rate loans to European banks.

Klaas Knot, the Netherlands' central bank president, was addressing students at the University of Amsterdam.

He said that a spike last week in the interest rate of Spanish government bonds was due to "awkward communication" by Spanish authorities about their plans for budget cuts.

"We're not at the edge of the abyss and I think the markets overreacted somewhat," he said. "Spain is making the structural changes that are necessary."

Asked directly whether the ECB would engage in buying Spanish or Italian bonds if interest rates — the so-called "yield" — rose further, or whether it would launch a new longer term refinancing operations (LTRO) offering banks liquidity at low interest rates, he said he "wouldn't speculate."

"That's very far away from the current situation," he said. "The instrument exists, but it hasn't been used for a long time...and I hope it isn't used again."

"I don't see any need for it," he said.

He added that the ECB's two previous LTROs "have a tense relationship" with the central bank's rules against financing governments, since banks may use the loans to buy government bonds.

He estimated the previous LTROs are still having an impact and financially stressed countries have three years to reform.

Separately, Knot said that the Dutch government must announce cost-cutting measures to reduce its own budget deficit to below the 3 percent limit mandated by European rules by 2013 or risk "losing the confidence" of financial markets.

Despite relatively low levels of national debt, the Dutch economy is in a mild recession and the government deficit is forecast to run at 4.6 percent in 2012.

Knot said that if the Netherlands lost its triple A credit rating, it would likely see interest rates on its own bonds rise by around 1 percent.

Many economists — including the head of the Dutch government's own economic think-tank — have said further spending cuts would be a mistake and the Netherlands will cause structural damage to its own economy by severely curtailing spending during a recession. Knot conceded the downturn is likely to be worse than otherwise due to the cuts, but said the potential fallout if the Netherlands loses the confidence of financial markets poses the greater risk.