FRANKFURT (MNI) – Implementing one monetary policy for the entirety
of the Eurozone has become ever more difficult owing to the increasing
fragmentation of the area, European Central Bank Executive Board member
Benoit Coeure said Monday.

Speaking at a conference at the ECB, Coeure, according to a text
provided by the bank, said that the ECB is prepared to absorb liquidity
should its presence in the system threaten the stability of prices.

“Over the past few years, the mounting pressures in funding markets
have led to a growing fragmentation of the banking system of the euro
area along national lines,” he asserted. “Links between banks and
sovereigns have grown tighter, and in some countries the credit supply
has been negatively affected. The conduct of a single monetary policy
has become increasingly difficult as the transmission channels have
become heterogeneous.”

Citing April’s report on Financial Integration in Europe, Coeure
said that price-based and quantity-based indicators “also continue to
point to a further and significant renationalisation of euro area banks’
funding markets.”

While banks on the periphery showed an ongoing loss of market
funding, other countries’ banks were able to issue debt with
“attractive” yields, he said.

“All in all, we can say that the renationalisation of the credit
supply, coupled with funding pressures on both banks and sovereigns in
certain countries, has weakened the impact of monetary policy, as partly
unjustified domestic spreads keep rates applied to households and
non-financial corporations higher than what would be consistent with
monetary policy rates,” he said.

One of the reasons the single monetary policy is not being
transmitted properly is that “sovereign spreads in some peripheral
countries, which are today the basis for the pricing of bank funding,
can rise above what fundamentals would suggest, as they reflect various
concerns felt by market participants, from over-pessimistic views of
macroeconomic trends to redenomination risk,” according to Coeure.

The spillover effect from the sovereign market to banks’ funding
costs further impairs the monetary policy transmission mechanism, he
said.

The Outright Monetary Transactions announced by the ECB to deal
with the blocked transmission of monetary policy “would be implemented
to the extent that they are warranted from a monetary policy perspective
for countries under an EFSF/ESM macroeconomic adjustment or
precautionary programme, as long as programme conditionality is fully
respected,” he said, adding that the involvement of the IMF would be
sought.

OMTs would be suspended for the duration of the review of a given
program and then resume, he said.

“The announcement of the OMTs has reduced concerns about the
materialisation of destructive scenarios,” Coeure asserted. “But it is
essential that governments continue to implement the necessary steps to
reduce both fiscal and structural imbalances and proceed with financial
sector restructuring measures.”

To alleviate the funding needs of Eurozone credit institutions, the
ECB has provided liquidity, Coeure noted. Although “liquidity can become
destructive if it gets out of control,” he said, “the ECB will stand
ready to withdraw liquidity when upward risks to medium-term price
stability materialise.”

–Frankfurt bureau tel: +49-69-720-142. Email: dbarwick@mni-news.com

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