Euro zone governments shouldn’t expect free lunch from ECB, governors say

(Reuters) – Euro zone governments should not expect unconditional support under the European Central Bank’s new tool to stop borrowing costs from rising too far for the most indebted countries, two ECB policymakers said on Tuesday.

The ECB has pledged fresh action to prevent financial “fragmentation” between the euro zone’s most indebted countries, such as Italy, and safe-haven Germany after a sudden, sharp widening of spreads between bond yields.

But Slovak central bank governor Peter Kazimir and his Finnish peer Olli Rehn set a high bar for any ECB intervention on the bond market.

Kazimir said it was not just the ECB’s job to cap spreads, which are also caused by certain countries’ economic fragility and the euro zone’s incomplete architecture as a currency union with no fiscal backstop.

“When we talk about fragmentation, often we are knocking on the wrong door, and the key and substantial question is for the economies of the countries to modernise, innovate, be more resistant to these problems,” he told reporters in Bratislava.

Rehn said no country will automatically be eligible to benefit from the upcoming ECB tool designed to limit spread widening – a possible reference to conditions attached to any ECB purchase of a country’s debt.

Sources told Reuters last week the ECB is likely to attach some loose strings to the scheme, such as compliance with the European Commission’s economic recommendations.

“To me it is very clear there is no automaticity and there is no one single benchmark,” Rehn told a news conference in Helsinki. “There has to be plenty of room for judgment … practiced by the ECB Governing Council.”

The ECB unveiled plans to devise this new tool last week but it failed to provide any detail and policymakers’ comments since then highlight there is no agreement yet on what it should look like.

The Bank of Italy’s Ignazio Visco said last week the premium paid by Italy over Germany to borrow for 10 years was unjustifiably high at more than 200 basis points while it should be below 150.

But Latvian governor Martins Kazaks later told Reuters the ECB shouldn’t target specific spread levels but simply ensure that its interest rates are passed on to all corners of the euro zone.

(Reporting by Anne Kauranen in Helsinki and Jason Hover in Prague; Writing by Balazs Koranyi and Francesco Canepa in Frankfurt; Editing by Catherine Evans and Raissa Kasolowsky)