— Current Situation Warrants EFSF Bond Mkt Intervention

FRANKFURT (MNI) – Cutting interest rates could help bolster
confidence and will likely be discussed again at the next Governing
Council meeting, European Central Bank Executive Board member Benoit
Coeure said in an interview with the Financial Times released Wednesday
evening.

Coeure also called on the Eurozone’s bailout fund, the European
Financial Stability Facility, to buy government bonds in order to drive
down borrowing costs for troubled peripheral EMU states, noting severe
strains in sovereign debt markets.

“Cutting rates is certainly an option as far as our monetary policy
is concerned. It was discussed at the last governing council meeting and
I would expect the next council to discuss it again, ” Coeure said.
While it certainly would not fix the fundamental problems, it could
“alleviate some of the consequences of the current situation, in
particular in terms of confidence,” he told the paper.

Suggesting that he sees no obstacle to cutting the ECB’s main
refinancing rate to a new record low from the current 1%, Coeure noted
that “we are in a situation where there is no threat to medium-term
price stability.”

The French board member hinted that the ECB would support EFSF
interventions in the secondary market. Under EFSF rules, the ECB must be
consulted before the fund buys sovereign bonds.

“Current circumstances would probably warrant EFSF intervention in
the secondary market – provided that this happens against the right
background of political decisions and solutions to the underlying issues
and strong conditionality,” he said.

Coeure noted that the EFSF’s E440 billion gives the fund enough
capacity to “alleviate temporary tensions on secondary markets,” and he
rejected the notion that given the ECB’s unlimited capacity, the central
bank should step in instead.

“We have a bond buying programme, the securities markets programme.
The SMP has not been terminated, but it is an instrument of monetary
policy. It is not an instrument that can be used to fix fiscal
difficulties or to help insolvent banks,” Coeure said. “Don’t mix up the
central bank with the fiscal authorities.”

Nevertheless, Coeure said that the SMP not only remains in the
ECB’s toolbox but could be successful again. However, “we do not
consider that the SMP would be the best instrument to use at the current
juncture,” he said.

Coeure also would not exclude the option of an additional LTRO, but
he dampened any expectations of immediate action. “Is a third LTRO
possible? Yes, it is possible, but it would probably be warranted only
in the face of generalized liquidity challenges – and it is probably not
the best instrument in the case of localized difficulties for banks,” he
said.

Localized difficulties in part relate to collateral shortages in
some banking sectors. “We have not reached the point where there is a
collateral shortage, but certainly the amount of excess collateral, the
collateral buffer – which is very substantial at the aggregate level in
the euro area – has become more strained in some places,” Coeure noted.

“There is an ongoing reflection on how to alleviate these tensions.
What is important is that any adjustment of our collateral framework
should not increase the risk exposure of the Eurosystem,” he said. “If
needed,” the ECB could widen what is acceptable as collateral, “but
this would have to come with strict risk control, in particular with
haircuts,” he added.

–Frankfurt newsroom +49 69 72 01 42; e-mail jtreeck@marketnews.com

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