March 18, 2020 / 9:37 PM / in 16 days

ECB 'absolutely determined' to fight euro fragmentation risk: Villeroy

PARIS (Reuters) - The European Central Bank is determined to prevent fragmentation between euro zone countries, ECB policymaker Francois Villeroy de Galhau said on Wednesday following a surge in borrowing costs between countries.

As the outbreak of coronavirus spurs investor risk aversion, the difference in yields has blown out in recent days between highly debt-laden euro zone members like Italy and countries seen as ultra-safe like Germany.

“We are absolutely determined to fight the risk of fragmentation between euro zone states and against the detonation of long-term financing conditions,” Villeroy, who is also head of the French central bank, said in an interview with French business newspaper Les Echo.

Italian yields reversed some of the recent increases on Wednesday, following a report that EU leaders were working on a plan that may end with the ECB stepping in to buy the country’s bonds in bulk.

ECB board member Isabel Schnabel said the ECB was ready to counter market turmoil, a message aimed at halting the massive bond market sell-off that has raised doubts about the sustainability of Italy’s debt.

Villeroy said that the ECB was prepared to temporarily focus its bond purchases on certain countries more than others if the situation required it.

“If we need to do more bond purchases during this exceptional period then we will do it,” Villeroy said.

He added that while equity markets had seen sharp losses recently there was no reason to close them and that in any case the ECB was focused on keeping debt markets functioning and liquid.

With new corporate bond issues all but grinding to a halt, Villeroy said that the ECB could intervene in the short-term commercial paper market as the U.S. Federal Reserve did on Tuesday.

“There is a (market) segment that needs us to quickly step up our action and it’s the commercial paper market for short-term corporate financing, which is not liquid enough,” he said.

The Fed reactivated on Tuesday an operation used during the 2008 financial crisis to get credit directly to businesses, as liquidity had dried up and prices had risen in the commercial paper market due to the coronavirus outbreak.

The commercial paper market is an important unsecured, short-term funding market, where companies typically pledge future accounts payables or inventories for cash, which they repay in less than a year. That market has been under strain in recent days amid growing fears that companies suffering business disruptions due to the virus may not be able to pay back the cash.

Reporting by Leigh Thomas; Editing by Chizu Nomiyama

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