September 17, 2012 / 6:38 PM / 6 years ago

Coene says rate cuts and LTROs both options for ECB

LONDON (Reuters) - The ECB could cut its main interest rate, put its deposit rate into negative territory and offer banks a new round of ultra-cheap funding, policymaker Luc Coene said on Monday, adding Spain’s borrowing costs would soar again without a support program.

Belgium's Central Bank Governor Luc Coene presents the bank's annual report in Brussels February 13, 2012. REUTERS/Francois Lenoir

ECB Governing Council member Coene said it was “very unlikely” that the ECB would ever engage in outright quantitative easing but that the central bank had a number of other options to ease monetary policy if required.

“You could further lower interest rates, you can also try to extend the LTROs to some extent, you can also do some LTRO with private credit claims as collateral,” he said during a seminar organized by the European Economics and Financial Centre.

A handout of cheap long-term funding linked to credit claims — typically loans to firms or households— would be a move to try and tempt banks into new lending.

Asked on charging banks to deposit cash at the ECB overnight, he added: “That is certainly one of the options, that is not at all excluded.”

Coene is the head of the Belgian central bank, a position which brings with it a seat on the ECB’s 23-member Governing Council.

The ECB’s vow to buy potentially unlimited amounts of Italian and Spanish bonds if the countries admit themselves into fiscal rehab programs has seen a dramatic reduction in the market turmoil which was threatening the euro’s future.

Coene said the ECB would not lose the appetite for the purchases as it did for its Securities Markets Programme because they were now directly tied to countries submitting themselves to fiscal rehabilitation programs.

He said the ECB would make its own decisions on whether a country was sticking to its promises.

“We could turn the purchases on and off instantly overnight,” he said, adding the Governing Council would not be rely on politicians’ views.


Spain’s borrowing costs were also likely to jump again if it tried to avoid taking a politically unpopular aid program.

“If Spain does not submit to a conditionality we will not buy its bonds... I don’t think it will take long for Spanish spreads to rise (if Spain does not submit to program),” Coene said.

The process may already be under way. Spain continues to show little sign of requesting aid and its 10-year bond yields crept back to 6 percent on Monday, highlighting the pressure it is likely to come under if it holds off indefinitely.

Coene also stressed that the ECB would take losses on any bonds bought under its new program, known as Outright Monetary Transactions (OMT). He also refused to rule out the ECB swallowing loses on its Greek bonds.

“President (Mario) Draghi has made it clear that for the OMT we will not apply the seniority rule that was applied for the SMP, that is also the reason we mark-to-market the bonds we buy on our balance sheet,” he said, referring to the ECB president.

“The past is still an open question and we will see how this one plays out,” he said referring to the bank’s Greek bonds.

Marking the bonds “to market” rather than committing to hold them until they mature also leaves to ECB free to sell them if it so wished, Coene noted.

He also said parts of the new program’s design meant there were built-in limits to how much it could spend.

Only bonds with three or fewer years until they mature will be bought under the plan, and Coene said there was a clause stipulating that it will not purchase anything issued after the start date of the program.

It is a move which will prevent governments issuing hoards of short term bonds to take advantage of the ECB’s buying scheme and, while in theory it could repeat the plan, it provided a clear limit to the amount of bonds it was expected to buy, Coene said.

Reporting by Marc Jones; Editing by Ron Askew and Roger Atwood

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