–Talk Of More ECB LTROs Premature, Should Give Them Time To Work

By Chris Cermak

NEW YORK (MNI) – European Central Bank Governing Council member
Ewald Nowotny Monday said covered bond purchases remain “part of our
toolbox” but were not being used for the time being, stressing instead
that the ECB’s liquidity operations should be given time to work.

In a question and answer session after a speech at the Stern School
of Business in New York, Nowotny said that, should market stress return,
“we can have a number of ways of liquidity provision.”

Also speaking to reporters after the event, Nowotny said the
covered bond program remains “part of our toolbox but it is not
something that is for the time being active.”

Nowotny said it was “quite clear” that there will be a
“restructuring” of some European banks that face insolvency rather than
just liquidity issues, but he acknowledged this could only take place
“over the medium term and if there is a certain stabilization” in
financial markets.

Nowotny said talk of further LTROs by the ECB were “premature,”
telling reporters after the speech that “It makes sense really to give
some time to see the full effects.”

On bond purchases, Nowotny made clear the ECB had no red line for
acting in terms of yields — such as the 6% yield on 10-year bonds often
targeted as a breaking point by markets.

“We have to decide on every specific case,” Nowotny told reporters.
The decision would be based on “the specific economic situation for the
Eurozone in general and each country.”

Nowotny also praised steps taken by Italy and Spain that should be
rewarded by markets. The central banker pointed to the “clear positive
reaction of markets” to Italy’s reform program and on Spain said he
believes “markets will be convinced that this government takes things
seriously.”

With markets at times overreacting to the sovereign debt crisis,
Nowotny said “both timing and the right volume are essentials” for ECB
policy. “This is part of the art of central banking.”

“The ECB has been always very cautious to do what is necessary to
stabilize markets, but to be very much aware of not creating potential
problems in the long run,” Nowotny said.

Asked about the possibility of eurobonds, Nowotny maintained he
does “not see this as a practical perspective” and had no expectation
that eurobonds would be implemented “as a general aspect of financing.”

** MNI Washington Bureau: 202-371-2121 **

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