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ECB Said to Oppose German Push to Alter July 21 Rescue Accord

October 10, 2011

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Oct. 10 (Bloomberg) -- The European Central Bank opposes Germany’s push to rewrite the euro area’s 12 week-old-rescue plan as leaders prepare the ground for a potential Greek default, a central bank official said.

ECB policy makers inserted a line into last week’s monthly policy statement that was aimed at Germany’s push to impose bigger haircuts on European banks, the official said under condition of anonymity. The sentence, read out by President Jean-Claude Trichet at a press conference in Berlin, urges “all euro area governments to fully implement all aspects” of the July 21 summit agreement.

German and French leaders are moving beyond the July accord, which targets bank losses of 21 percent on Greek debt, amid rising pressure to stem a crisis that threatens the world economy. Chancellor Angela Merkel and President Nicolas Sarkozy yesterday pledged to provide a blueprint for recapitalizing European banks that would help them survive any Greek default.

Merkel has said that Europe’s bailout fund could be used to inject more funds into banks. The ECB is concerned that this would erode the facility’s ability to start buying the bonds of debt-strapped nations, a task currently undertaken by the ECB.

While recapitalizing banks is “important,” the priority at the moment for the European Financial Stability Facility “is to provide support to new bond issuance by, for instance, Italy or Spain,” ECB Vice President Vitor Constancio said in a speech in Milan today.

Trichet’s Statement

While Trichet and other policy makers have publicly urged governments to stick to the July 21 agreement, this month’s introductory statement was the first to include a specific reference urging ratification of the accord. An ECB spokesman declined to comment.

As part of the second Greek bailout in July, euro-area leaders asked bondholders to contribute by accepting losses of 21 percent through debt exchanges and rollovers. The summit also gave the go-ahead for the region’s temporary rescue fund -- the EFSF -- to gain the authority to buy sovereign bonds on the secondary market, help recapitalize banks and offer credit lines to governments. The EFSF’s current role is to sell bonds to finance rescue loans.

Finance ministers on Oct. 4 hinted that bondholders may be saddled with bigger losses on Greek debt and that the July agreement might be recrafted. German Finance Minister Wolfgang Schaeuble said then that “adjustments” may be needed.

ECB’s Burden

The ECB has so far been left to shoulder the main burden of the 21 month-old debt crisis. It is giving banks as much liquidity as they need against collateral and has bought 163 billion euros ($223 billion) worth of government bonds since May 2010, a decision opposed by some policy makers. Juergen Stark on Sept. 9 announced he will resign from the ECB’s Executive Board in protest at the purchases and Governing Council member Jens Weidmann said last month the bank should reduce the risks on its balance sheet rather than increase them.

The central bank official rejected suggestions of involving the ECB in EFSF leverage to increase the fund’s firepower. That might involve either issuing the EFSF with a banking license, allowing it to refinance itself via the ECB or even guaranteeing a proportion of losses on government bond purchases if the ECB were continue to buy them.

--With assistance from Jonathan Stearns in Brussels. Editors: Craig Stirling, John Fraher

To contact the reporters on this story: Gabi Thesing in London at

To contact the editor responsible for this story: Craig Stirling at

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