ECB bond purchasing needs to be seen as “real” to work: IMF

The director of the IMF’s monetary and capital markets department, José Viñals, a former deputy governor of the Bank of Spain, on Wednesday said that the euro zone remains the biggest threat to world financial stability.

At the IMF’s annual meeting in Tokyo, Viñals called for stronger banks, more integration in the single currency bloc and powerful firewalls. The European Stability Mechanism (ESM) rescue fund and the European Central bank’s bond-purchasing program “must be regarded by markets as real, not virtual, and it should be coupled with credible conditionality,” the IMF official said.

Viñals told a news conference in the Japanese capital that it was up to Spain to decide whether to ask the ESM for assistance, a move that would trigger bond purchases by the ECB. He said the announcement of the bond-purchasing program had helped narrow the risk premium of financially stressed countries such as Spain and Italy, although he insisted that investors would not take favorably to countries that refrain from asking for help when they need it, or if a bailout was denied to a country that required one.

An IMF report presented by Viñals in Tokyo warned that Spain’s risk premium could hit 750 basis points if the European authorities failed to take appropriate decisions in time. Spain’s risk premium eased x basis points on Wednesday to close at 4xxx. It had reached levels of well over 600 basis points prior to ECB President Mario Draghi’s pledge to do everything possible to save the euro. The ECB later unveiled a new bond-purchasing program for countries that seek help from the ESM.

The government of Prime Minister Mariano Rajoy has insisted on having the details of the conditions that would be attached to seek assistance from ESM before making up its mind on the road he wants to take. However, there appears to be some division within the Eurogroup about extending yet another bailout.

German Finance Minister Wolfgang Schäuble has said that Spain does not need another bailout other than the one it has been granted to recapitalize its banks.

The IMF praised the new ECB bond-purchasing program, which it said had corrected the defects of the previous one. However, it also said it could see political risks and risks in executing it. Bundesbank President Jens Weidmann is strongly opposed to the program.

The IMF’s Global Financial Stability Report said the bond-purchasing program “does not give categorical assurance that debt stability would be restored.”

Viñals noted a level of fragmentation in the financial markets, as clearly evidenced by the division between core and peripheral countries in the euro zone, such as Spain and Italy. This has raised their borrowing costs and sparked large outflows of capital. The IMF official said it was his “firm belief” that this process of fragmentation could be reversed.