Spanish Minister Asks ECB to Buy Bonds as Crisis Deepens
By Emma Ross-Thomas – Apr 14, 2012 3:16 PM GMT+0100
A Spanish minister called on the European Central Bank to do more to stem the sovereign debt crisis as the cost of insuring the country’s bonds against default surged to a record.
“They should step up purchases of bonds,” Jaime Garcia- Legaz, a deputy minister in Luis de Guindos’s Economy Ministry, said yesterday in an interview.
His comments came as ECB officials split over the steps to tame the crisis amid growing expectations that Spain will be the next euro member to seek a European bailout. Spanish banks’ borrowings from the ECB surged almost 50 percent in March, data showed yesterday, as they took almost a third of the longer-term lending offered to euro-region institutions.
Prime Minister Mariano Rajoy is struggling to convince investors he can get Spain’s finances under control after last month refusing to meet deficit targets set by the European Commission and the previous government. While Rajoy said on April 12 Spain won’t need a rescue, credit-default swaps rose 17 basis points to 498 yesterday, surpassing the all-time high closing price of 493, according to CMA.
The yield on Spain’s 10-year bonds rose 16 basis points to 5.98 percent, edging closer to the 7 percent level that pushed Greece, Ireland and Portugal into rescues.
Rajoy’s austerity plan today won the support of leaders from the 12 regions where his Peoples Party governs. There are 17 in total. The PP’s regional presidents pledged to cut public services, eliminate duplication between different levels of government and write deficit targets into their budget laws.
Garcia-Legaz’s comments go beyond those of his prime minister, who has repeatedly praised the ECB’s extraordinary liquidity measures. Budget Minister Cristobal Montoro referred yesterday to the “importance of the role” of European institutions in fighting the crisis.
“If you’re demanding ultra-restrictive fiscal policies from Spain and Italy then it makes sense to have monetary policy with stronger bond purchases,” said Garcia-Legaz, a former secretary general of the Faes research institute that’s linked to the ruling People’s Party.
ECB officials are nevertheless struggling to present a united front over what to do next as investors dump Spanish bonds amid renewed concern about bad assets at the country’s banks.
While Executive Board member Benoit Coeure signaled on April 11 the bank may start buying Spanish bonds, his Dutch colleague Klaas Knot said yesterday that the ECB is “very far” from reactivating a policy that failed to stop a selloff in Spanish bonds in November.
“I hope we never have to use it again,” he said in Amsterdam.
Spanish yields surged above 6 percent in August, prompting the ECB to start buying bonds, and reached 6.78 percent in November before ECB President Mario Draghi said the bank would offer financial institutions unlimited three-year loans.
That measure helped tame Spanish borrowing costs, as institutions used ECB funds to pile up on the nation’s bonds. Spanish banks’ holdings of government debt jumped to 220 billion euros ($288 billion) in January from 178 billion euros in November, according to data from the Treasury.
Average net borrowings from the ECB by Spanish banks climbed to 227.6 billion euros last month from 152.4 billion euros in February, the Bank of Spain said yesterday on its website. In net terms, they tapped more than 60 percent of the amount taken by euro-region lenders.
Still, Garcia-Legaz, a former deputy director of Spain’s Treasury who’s now in charge of trade, said Spain won’t have trouble funding itself as the deficit cuts implemented since the government took over in December bolster confidence. The central government faces 11.9 billion euros of bond redemptions in April, 12.7 billion euros in July, and 20.2 billion euros in October, Treasury data show.
“With the profile of redemptions it has and the credibility that will be generated from the deficit reduction, it won’t have problems financing itself,” he said.