As talks of global finance chiefs ended yesterday in Washington, euro-area central bankers from Draghi to Bundesbank President Jens Weidmann argued they have done enough by cutting interest rates and issuing more long-term bank loans.

“None of the advice that the IMF is offering has been discussed by the Governing Council, in recent times at least,” Draghi said on April 20 while attending IMF meetings in Washington. Weidmann said in an interview that “the problems in Europe can’t be solved by monetary policy measures.”

Officials in Europe and around the world are bickering about additional crisis-calming steps, as turmoil returns to the continent’s bond market amid concern that Spain may need a bailout. While Draghi says Spain and Italy need to agree further action, Prime Minister Mariano Rajoy’s government wants the ECB to reactivate its bond-buying program.

Spain and Italy have made “remarkable” progress on structural changes, Draghi said. Even so, the process is far from complete for both countries, he said.

“The ECB is drawing a line to keep pressure on governments to make the necessary adjustments,” said Megan Greene, head of European economics at Roubini Global Economics LLC, who was in Washington. “If push came to shove the ECB would step in, but they’ll hold the line for now.”

Minority Government

Political considerations may dominate in the euro area this week. France held the first round of its two-part presidential election yesterday, with the process scheduled to reach a conclusion on May 6. A defeat for the incumbent, Nicolas Sarkozy, would mirror the fate of governments in Ireland, Portugal, Greece, Italy, Spain, Slovenia and Slovakia that have been ousted since the onset of crisis in the 17-nation currency group.

In the Netherlands, Prime Minister Mark Rutte today meets his cabinet to discuss a strategy for passing a budget that meets European Union targets. Early elections will probably be called after Geert Wilders’s Freedom Party withdrew its support for the minority government on April 21 over how to narrow the deficit.

‘Flexibly and Aggressively’

Even before the IMF used the Washington meeting to win more than $430 billion in fresh funds to help safeguard the world economy from Europe’s woes, the ECB was lobbied to consider additional steps. The fund suggested last week that the Frankfurt-based central bank lower its benchmark interest rate and keep its crisis-fighting liquidity measures in place to support banks.

While stopping short of making detailed recommendations, U.S. Treasury Secretary Timothy F. Geithner also said the ECB and other European authorities should act decisively to end the turmoil.

“The success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets,” Geithner told the IMF.

European governments also chafed at suggestions they haven’t been pro-active enough, a month after boosting rescue funds to 800 billion euros ($1 trillion). “We can tell the world with full conviction that the Europeans have met their commitments,” German Finance MinisterWolfgang Schaeuble said.

Record Low

Since Draghi took office in November, the ECB has returned its key rate to a record low of 1 percent even as its balance sheet has ballooned by almost 30 percent with unprecedented three-year loans to banks totaling more than 1 trillion euros ($1.3 trillion).

Such actions won support from Bank of Japan (8301) Governor Masaaki Shirakawa, who warned failure by governments to restore fiscal order following the ECB’s liquidity boost risks sparking “uncontrollable inflation.”

While the ECB’s steps helped calm financial markets their effects may be wearing off, with Spain’s 10-year bond yield this month nearing levels which triggered bailouts of Greece, Ireland and Portugal. Since March 2, Spanish bond yields have surged above those of Italy, igniting speculation that the Iberian nation may be the next to require a financial lifeline. Italian borrowing costs have also risen.

Italian bill and bond sales this week include a 2.5 billion-euro bond sale tomorrow and an 8.5 billion-euro treasury bill sale on April 26, while Spain will sell three- and six- month bills tomorrow.

Rising Yields

The ECB has not re-entered the government bond market and has not made any purchases for five straight weeks after buying 214 billion euros of bonds since 2010.

Executive Board member Joerg Asmussen nevertheless said in Washington that the ECB would “closely monitor the situation in the Spanish government bond market,” signaling the central bank may still act if rising yields threaten the ability of the euro area’s fourth-largest economy to borrow in financial markets. He also said markets shouldn’t automatically assume the ECB will offer more three-year loans.

Borrowing costs are rising in Spain and Italy after both diluted their targets for reducing budget deficits, raising concern among investors that their determination is dwindling as economies feel the bite of austerity.

Rates ‘Spur’

Further measures to quell financial turmoil in Spain risk stretching the credibility of the bank’s monetary policy, Luc Coene, ECB Governing Council member and governor of Belgium’s central bank, said in an interview on April 21.

“We have done what we can do so far within our mandate and within the possibilities we have,” he said in Washington. “The only thing we could do is overstretch ourselves and then we would even lose the credibility we have at that moment.”

Weidmann of the Bundesbank indicated the ECB may welcome higher borrowing costs as a way of forcing governments not to backpedal.

“Higher interest rates are also a spur toward reforms,” he said.

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net; Meera Louis in Washington atmlouis1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

http://www.bloomberg.com/news/2012-04-22/draghi-s-ecb-rejects-geithner-imf-push-for-measures.html

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