Bond spreads set to remain high - ECB's Honohan

EDINBURGH Tue Nov 13, 2012 9:55pm GMT

Patrick Honohan listens during an interview with Reuters, in his office, in central Dublin January 25, 2011. REUTERS/Cathal McNaughton

Patrick Honohan listens during an interview with Reuters, in his office, in central Dublin January 25, 2011.

Credit: Reuters/Cathal McNaughton

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EDINBURGH (Reuters) - Euro zone states will have to face the fact that their problems will not be solved this year and bond spreads will stay elevated for some time, European Central Bank board member Patrick Honohan said on Tuesday.

Nevertheless, Ireland's representative on the ECB board said anticipation of the ECB's new bond buying plan had had a "dramatic" effect in reducing peripheral countries' bond yields.

Honohan also warned that a plan for Europe-wide banking union, another plank of the euro zone's strategy to tackle its three-year debt crisis, might not fulfil all the expectations placed on it.

"I think we're in for a period of time in which spreads from different countries in the euro zone are going to remain different for quite a while," Honohan told an audience at an event in Edinburgh.

"It's not all going to be fixed before the end of the year."

Fears were reignited this week that Europe's troubles could flare anew after a public spat between Greece's international lenders over how it can bring its debts down to a sustainable level.

Honohan said it was up to them to solve the problem and it was not for him to comment on Greece's situation.

Honohan, who also heads Ireland's central bank, warned against expecting too much of the plan for a European banking union.

He said a deposit protection scheme would offer peace of mind to customers, but would not fully protect banks against wholesale bank runs.

Divisions over the ECB's cross-border supervisory powers overshadowed fresh European Union attempts on Tuesday to agree the key reform, which some officials fear could now unravel.

Honohan also doubted whether another element of the plan, a central scheme for winding down banks, would fully break the link between banks and governments.

"If greater private sector involvement in burden-sharing of future banking failures is envisaged, and if the single supervisory mechanism is sufficiently proactive and prompt, then it will not use substantial public funds," Honohan said.

"But that is not how the recent wave of failures has been dealt with. Can we be sure that enough will have changed in this respect for the future, or will the public purse be called upon again?"

Honohan said the ECB was well equipped to take some of the necessary steps to tackle the euro zone debt crisis, "even though some of them pushed the frontier of conventional monetary policy".

But he said designing the next actions would be challenging.

"The emergence of redenomination risk in market perceptions and its disruptive influence have generated undesired and damaging yield volatility. Additional corrective action, as recently announced, is clearly necessary," he said.

(Writing by Padraic Halpin in Dublin; Editing by Kevin Liffey)

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