FRANKFURT (Reuters) - The European Central Bank is ready to everything in its mandate to ease market turmoil, ECB board member Isabel Schnabel said on Wednesday just as Italian bonds suffered their worst selloff since the currency bloc's debt crisis.
Invoking the now famous words of former ECB chief Mario Draghi to do "whatever it takes" to save the euro, Schnabel said the ECB stood ready to do everything within its mandate to counter market turmoil, a message aimed at halting a massive selloff in debt markets.
Italy's borrowing were set for their biggest daily jump since the 2011 euro zone debt crisis on Wednesday on mounting worries about the country's debt sustainability as coronavirus wreaks havoc.
The selloff was aggravated by concerns that the ECB may be reaching the limits of its policy space and could not do much more.
"The ECB is ready to do everything in its mandate to counter market turmoil that disrupts monetary policy transmission, otherwise monetary policy cannot function," Schnabel told German newspaper Die Zeit in an interview.
But she also cautioned against overestimating the power of central banks, arguing that monetary policy alone could not solve the problem.
A source at the Bank of Italy meanwhile said that the central bank was intervening in the market to ensure orderly market conditions.
Italy, at the centre of the coronavirus outbreak in Europe, saw its 10-year government bond yields jump more than 60 basis points at one point, pushing past 3% to their highest level since early last year.
The selloff was reinforced by ill-timed comments by Austrian central bank chief Robert Holzmann, who suggested in an interview that monetary policy was at its limits and the ECB could not deliver on market expectations.
Attempting to correct his words, Holzmann later said that monetary policy "has by no means" reached its limits but not before a rare public rebuttal from the ECB.
Holzmann's comments only add to the ECB's communication headache. It struggled last week to take back comments from ECB chief Christine Lagarde that the bank was not there to lower bond spreads in the euro zone, a remark that touched off an even bigger selloff in Italian bonds, irritating policymakers and government officials.
Illustrating market difficulties, the ECB lent euro zone banks $112 billion at two auctions aimed at easing stress in the U.S. dollar funding market, part of the financial fallout of the coronavirus outbreak.
The ECB said it had allotted $75.82 billion in its new 84-day auction, introduced by major central banks last weekend in response to global demand for greenbacks, and $36.27 billion at its regular 7-day tender.
The ECB's problem is that the borrowing costs of its weakest members soared in recent days, even as the bank said it was willing to intervene because it was hurting policy transmission.
Ten-year Italian yields were 271 basis points above their German peers (DE10IT10=RR) while the spread over Spanish bonds was 170 basis points. Greece, not part of the ECB's asset purchase programme, fared even worse with spread widening to almost 400 basis points.