EFSF should buy government debt, ECB governor tells FT

Date: Thursday 21 Jun 2012

German chancellor Angela Merkel´s remarks yesterday evening to the effect that using the European rescue funds to buy European debt is a possibility (while adding that there are no concrete plans) seem to have sparked some confusion in markets, given the conflicting headlines recently on this subject.

Nevertheless, one wonders if simply admitting such a possibility marks a change, although for at least some commentators it does not (this morning she appears to be further playing down such a possibility according to some reports).

Against that background, last night European Central Bank governor Benoit Coeure told the Financial Times that, "certainly it's a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility."

However, the policy-maker added that he rejects arguments that the central bank ought to reactivate its Securities Markets Programme, or SMP, through which it has purchased government debt on the open market in the past.

"At the very least, therefore, it would seem that the topic of bond purchases in the open market is very much in the air, which is a testament to just how critical the current juncture is (as evinced by the recent pre-emptive moves undertaken by the Bank of England and the US Federal Reserve). In turn, that is probably behind the 'cross-fire' of conflicting headlines and opinions we are seeing, as the debate heats up ahead of the Eurozone summit scheduled for the end of the month," comment analysts at Digital Look.

Lastly, Mr.Coeure indicated that an interest rate cut may be discussed at the ECB´s next policy meeting on July 5th.

AB

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