ECB's aggressive stimulus no threat to financial health - Coeure

FRANKFURT/PARIS (Reuters) - The European Central Bank sees no evidence that its aggressive stimulus policy is hampering financial markets, ECB director Benoit Coeure said on Monday, despite deeply negative yields on some bonds and fresh signs of scarcity.

His comments are likely to cool industry hopes for fresh ECB action to alleviate pressure on bond markets by lending out more of the 1.4 trillion euros ($1.49 trillion) worth of government debt it has bought or changing the country composition of its purchases.

They come just after a new spike in the cost of borrowing German and French debt last Friday, which signalled investors were struggling to source enough high-rated bonds to use as collateral to guarantee their trading positions.

Coeure blamed political risk in some European countries and stricter financial rules since the crisis for boosting demand for short-term German government bonds, a form of investment regarded as safe, and pushing yields on that paper deep below zero.

He said there was scant evidence that this was directly caused by the ECB's purchases of government debt or its charge on bank deposits, two of the extreme measures deployed by Frankfurt to boost inflation.

"So far we see no evidence that the current constellation of interest rates bears risks for the smooth functioning of markets, nor to financial stability or the transmission of our policy," Coeure told an event in Paris.

Also allaying the prospect of technical changes to the ECB's purchases, chief economist Peter Praet told a Spanish newspaper the ECB would continue to buy government bonds according to each country's contribution to the bank's capital.

The cost of borrowing German and French government bonds rose to 1.9 percent and 1.2 percent, respectively, on Friday as banks closed their books for the first quarter and became reluctant to lend. It normally hovers around 0.5-0.6 percent.

After a much larger squeeze around New Year, industry body the International Capital Market Association called on the ECB to act to ease the squeeze or face the risk of some institutions being unable to post collateral in time, exposing them to the danger of default.

Coeure said the reduction in the pace of ECB purchases to 60 billion euros from this month should provide some relief but added the demand for short-term bonds is likely to remain high.

"For the time being, these factors are ... likely to continue exerting a certain degree of downward pressure on short-term bond yields," he said.

(Editing by Catherine Evans)

By Francesco Canepa and Leigh Thomas