Bloomberg News

Germany Rejects Using ECB to Lift EFSF Rescue-Fund Firepower

September 17, 2011

(Adds comment from Geithner in eighth paragraph.)

Sept. 17 (Bloomberg) -- Germany’s top two finance officials rejected using the European Central Bank to boost the euro-area rescue fund’s firepower, rebuffing a suggestion by U.S. Treasury Secretary Timothy Geithner.

Inviting Geithner to a euro meeting for the first time, European finance chiefs who wrapped up two days of talks in Wroclaw, Poland, today also said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.

The German stance risks leaving the euro area without sufficient means to prevent the crisis from engulfing Spain and Italy. Geithner floated a variation of a 2008 policy he developed while at the New York Federal Reserve that would expand the reach of the 440 billion-euro ($607 billion) European Financial Stability Facility using leverage in a partnership with the ECB, said Irish Finance Minister Michael Noonan.

“The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market,” Bundesbank President Jens Weidmann told reporters today. “If it’s done via the central bank it constitutes monetary state financing,” which is forbidden under European Union rules.

‘Non-Member’

Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro region finance ministers, said yesterday: “We’re not discussing the increase or the expansion of the EFSF with a non-member of the euro area.” Instead, the ministers recommitted to a July 21 decision to empower the fund to buy bonds in the secondary market, offer precautionary credit lines and create a bank-recapitalization facility.

“We don’t think that real economic and social problems can be solved by means of monetary policy,” said German Finance Minister Wolfgang Schaeuble, speaking alongside Weidmann after the meeting of EU finance ministers and central bank governors. “That has never been the European model and it won’t be.”

Neither German policy maker ruled out leveraging the backstop’s lending capacity, saying the feasibility of the idea depends on how it’s done. It wouldn’t be acceptable to leave the ECB with the risks from such an operation, said Weidmann.

Europe projects an image of “ongoing conflict” between national governments and the central bank, hampering efforts to put the economy on a sounder footing, Geithner said yesterday at a banking conference in between euro meetings.

‘Big Question Marks’

Europe’s economy will barely grow in the second half of 2011, a casualty of the debt buildup that 256 billion euros in aid for Greece, Ireland and Portugal has failed to extinguish.

Germany’s credit risk on its contribution to the EFSF may reach 465 billion euros, the Ifo Institute said today. The risk has risen from less than 400 billion euros in April, the Munich- based economic institute said in a statement.

Weidmann said he would put “big question marks” on proposals to give the EFSF a license to let it operate as a bank that could tap the ECB for its refinancing.

The ECB was in the forefront again this week, joining other major central banks in offering dollar loans to ease a liquidity crunch that had confronted European banks with the highest costs for obtaining the U.S. currency in almost three years.

The ECB last month started buying Italian and Spanish government bonds after Europe’s debt crisis pushed their yields to euro-era records. Since starting its bond program on May 10, 2010, the Frankfurt-based central bank had spent 143 billion euros on sovereign bonds through Sept. 9.

--With assistance from Christian Vits and Rebecca Christie in wroclaw, poland. Editors: James Hertling, Patrick Henry

To contact the reporters on this story: Rainer Buergin in wroclaw, poland at rbuergin1@bloomberg.net; Jonathan Stearns in wroclaw, poland at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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