April 20, 2012 / 7:24 PM / 7 years ago

ECB's Constancio sees no need for Spain bailout

WASHINGTON (Reuters) - A senior European Central Bank official said on Friday Spain should be able to weather financial storms but a European bailout fund is available should it face any crisis.

“We don’t see any need for any involvement of the (European Financial Stability Facility) or other mechanisms in the case of Spain, as it stands,” European Central Bank Vice President Vitor Constancio said in response to questions after a speech.

Constancio had been asked whether the European Central Bank would play a role in supporting Spain should it come under pressure from financial markets over doubts it can pay its debts.

“But the instruments are there, of course,” he said. “We feel now that these important decisions were taken by the member states, that these mechanisms were decided to be used, and if need be, they should be used to address the problems of any member country.”

Spain is squeezed between efforts to cut its budget deficit and an economy that is expected to shrink by 1.7 percent this year. The country’s unemployment rate is approaching 24 percent.

Market pressure on Spain has re-emerged in the last two weeks, prompting the International Monetary Fund to call on the euro zone to use the EFSF, a temporary facility, or the permanent European Stability Mechanism to directly recapitalize Spanish banks to diminish rapid deleveraging in the sector.

Discussing euro zone monetary policy, Constancio said the monetary union is operating below its potential capacity and inflation should come down, making it unnecessary to begin tightening financial conditions.

“The output gap is still significant in the euro area ... all that confirms that inflation will subside going forward,” he said in a speech to the European Institute.

The monetary policy “stance is fully appropriate to the situation. ... Any talk of considering some sort of change or exit is premature,” he said.

The ECB is not expected to change policy at its May meeting, but observers are watching closely for any hints about plans for an exit from loose monetary policy.

Markets expect interest rates in Europe to stay on hold for rest of this year and well into next year.

Reporting By Mark Felsenthal; Editing by Andrew Hay

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