Asmussen opposes ECB bond buys if conditions not met

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By Paul Carrel | December 20, 2012 1:00 AM EST

European Central Bank policymaker Joerg Asmussen said he would want the ECB to stop buying sovereign bonds if its new purchasing programme was activated and the country concerned did not stick to the conditions attached.

Spain is the country most likely to benefit first from the ECB intervening under the programme - dubbed Outright Monetary Transactions (OMT) - but Madrid must seek aid from Europe's bailout fund before the central bank acts.

Such aid would come with conditions - reforms and budget targets - attached, though even if an aid plan were agreed the ECB would not be technically obliged to buy the country's bonds.

"There is no automaticity," Asmussen told journalists at an international press club dinner in Frankfurt on Tuesday evening.

"If we are in the situation (of activating the OMT) and a country no longer fulfils the conditions, I would be against continuing the bond purchases," he said, addressing concerns in his native Germany that OMT beneficiaries might be able to renege on commitments.

The ECB included a strong dose of conditionality under the OMT after being caught out with its previous bond-buying plan last year, the Securities Markets Programme (SMP).

The central bank bought Italian and Spanish bonds under the SMP, only for Italy's then prime minister, Silvio Berlusconi, to go back on reform promises he had made to get the ECB to step in, just days after he made the commitments.

Since launching the OMT in September, ECB President Mario Draghi has repeatedly said countries would only qualify for bond-buying support if they stuck to the conditions.

But his comments have failed to still doubts, mainly in Germany, that the ECB would still buy bonds even if a country failed to meet the conditions attached. Bundesbank chief Jens Weidmann was alone at the ECB in opposing the OMT.


Turning to interest rates, Asmussen played down the prospect of the central bank cutting its deposit rate - now at zero - any further.

"I would be very reluctant about doing that," he said, adding that "our (monetary) policy is very accommodative."

Asmussen's comments echo remarks from Yves Mersch, an inflation-busting hardliner who this week joined Asmussen on the ECB's six-member Executive Board. Mersch said he did not see the logic of a debate about rate cuts.

Their comments represent a push back against expectations of a rate cut, which grew after Draghi said there had been a "wide discussion" about rates at this month's policy meeting, when the ECB held its main rate at 0.75 percent.

Reflecting on his first year at the ECB, Asmussen said there were grounds to be "cautiously optimistic" about the euro zone now compared to January, when "the situation looked bleak".

But in a speech at the dinner entitled "Agenda 2013: the next steps in completing EMU", the former deputy German finance minister urged euro zone governments to complete a banking union and forge more economic integration in the bloc.

Under a landmark deal last week, the ECB will have new powers from 2014 that will give it automatic oversight of around 150 of the euro zone's 6,000-odd banks, and the authority to intervene in smaller banks if there are signs of trouble.

Setting up this single supervisory mechanism (SSM) is a first step towards a banking union that will lay a cornerstone for closer economic integration.

This should be complemented by a banking resolution mechanism to deal with problem banks, said Asmussen. The ESM bailout fund would be well suited to house a European Resolution Fund, said added, stressing that this was his personal view.

"Any costs incurred from resolution should first and foremost be covered by the private sector, through establishing a European Resolution Fund raised by levies on the banking sector," he said.

European public funds should only be used to help banks that pose a threat to European financial stability, said Asmussen, outlining a process with multiple steps:

- beneficiary banks must undergo an independent economic evaluation of their assets to ascertain their real capital needs and reveal any legacy problems;

- those banks must be assessed to have a viable business model and so be deserving of additional capital, otherwise they should be wound down;

- if the banks are to be kept going, private sector sources should be exhausted first, and if needed, use made of the bank-funded resolution financing;

- if there are still capital shortfalls, the financial resources of the beneficiary member states should be drawn on;

- only in the last step, would public funds be used.

Asmussen added: "The more the financial sector can be bailed in, the less it has to be bailed out."

(Writing by Paul Carrel; Editing by John Stonestreet)

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