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ECB helps orchestrate reprieve for Spanish financial markets

Central bank official suggests it may revive bond purchasing scheme

Remarks by a French executive board member of the European Central Bank provided some relief to Spain’s besieged financial markets on Wednesday after heavy selling the previous day.

The ECB’s Benoit Coeure said at an event in Paris on Wednesday that the attack against Spanish financial assets was not justified by Spain’s fundamentals and dropped a strong hint that the bank was prepared to intervene by renewing purchases of Spanish debt in the secondary market.

“Market conditions are not justified,” Bloomberg quoted Coeure as saying. “Will the ECB intervene? We have an instrument, the securities markets program, which has not been used recently but still exists.”

The spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent eased 24 basis points to 409 basis points. The blue-chip Ibex 35 added 1.93 percent to 7,576.70 after slumping to a new low for the year the previous day. The other European bourses also recovered, with the DAX in Frankfurt up 1.03 percent and the CAC 40 in Paris 0.62 percent to the good.

Spanish bond and share prices fell sharply on Tuesday after the Easter break despite Prime Minister Mariano Rajoy’s announcement the previous day of cuts in education and health spending of 10 billion euros. That came on top of a draconian state budget for 2012, which includes savings of 27 billion euros to meet the government’s target of reducing the budget deficit this year to 5.8 percent of GDP from 8.5 percent.

After a lull brought about by a massive injection by the ECB of three-year money at an interest rate of one percent, pressure has built again on Spanish government debt after the administration confirmed at the start of March that the country had failed to meet its deficit target for last year of six percent by 2.5 percentage points, sparking the need to step up the austerity drive.

“We have a new government in Spain that has taken very strong deficit measures,” said Coeure, who is in charge of the ECB’s market operations. “All this takes time. The political will is enormous.”

Coeure said euro-zone members should take advantage of the breathing space afforded by the ECB’s long-term liquidity injection to push ahead with reforms.

“We are seeing growing signs of normalization in entire segments of the [debt] market,” he said. “But the situation in the past few days shows the normalization is still fragile.”

Figures released Wednesday by the Labor Ministry showed the state pension fund has also been helping to prop up the market for Spanish government debt. Of the 65.830 billion euros invested by the fund in 2011, some 90 percent, or 60 billion, was in Spanish government bonds. In 2005 around 80 percent of the fund’s reserves were invested in Spanish Treasury issues.

The rest of the investments last year were in French, German and Dutch government paper. Total reserves of the fund at the end of last year amounted to 66.814 billion euros, up 3.79 percent from a year earlier. The increase was largely accounted for by interest on investments, which amounted to 2.217 billion euros.

After the reform of the pension system last year, under which the pensionable age was extended to 67 years from 65, the Social Security System estimates the pension system reserve fund will not have to be tapped because of deviations in demographic estimates until 2023.