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Bundesbank Steps Up ECB Bond Plan Criticism

August 20, 2012

Bundesbank Steps Up Criticism of ECB Bond Plan as Rift Widens

A Deutsche Bundesbank-branded pen is seen during a news conference at the bank's headquarters in Frankfurt, on March 13, 2012. Photographer: Hannelore Foerster/Bloomberg

Germany’s Bundesbank stepped up its criticism of the European Central Bank’s plan to embark on potentially “unlimited” government bond purchases, widening a rift over how to tackle the sovereign debt crisis.

“The Bundesbank holds to the opinion that government bond purchases by the Eurosystem are to be seen critically and entail significant stability risks,” the Frankfurt-based central bank said in its monthly report today. The new program “could be unlimited” and decisions about potentially far greater sharing of solvency risks should be taken by governments or parliaments, not by central banks, it said.

The comments suggest Bundesbank President Jens Weidmann won’t support a measure the ECB is rushing to design to help reduce governments’ borrowing costs and win them time to implement fiscal reforms. Spanish and Italian 10-year bond yields slid to the lowest in more than six weeks today after German news magazine Der Spiegel reported the ECB’s new program may set yield caps. In response, the ECB issued a statement saying it’s “misleading to report on decisions which have not yet been taken.”

‘Less Effective’

The euro fell against the dollar after the Bundesbank and ECB comments. It traded at $1.2301 at 2:15 p.m. in Frankfurt, down 0.3 percent today.

“The more loudly the Bundesbank protests, the less likely markets are to be impressed,” said Holger Schmieding, chief economist at Berenberg Bank in London. “That could make the policy less effective.”

President Mario Draghi said on Aug. 2 that the ECB is working on a plan to intervene in the secondary market to lower yields in countries that ask Europe’s bailout fund to buy its bonds in the primary market, ensuring conditionality. While ECB purchases would focus on the short end, details have yet to be finalized and policy makers will decide on the plan next month, Draghi said. He said Weidmann wasn’t in favor of the plan.

Italy and Spain, the countries now at the heart of the crisis as borrowing costs soar, have yet to say whether they will request help.

With the debt crisis continuing to threaten the global economy, Europe’s leaders are embarking on a week of diplomacy to find common ground. French President Francois Hollande and German Chancellor Angela Merkel will meet in Berlin on Aug. 23, while Greek Prime Minister Antonis Samaras travels to the German capital the next day before going on to Paris on Aug. 25.

Bond Yields

Italian and Spanish bonds rose after the Spiegel report. The yield on Spain’s 10-year government bond fell 24 basis points to 6.18 percent as of 1 p.m. in Madrid, while the yield on Italian 10-year bonds was 5.73 percent, down 4 basis points.

The ECB issued a statement today saying a bond-yield cap has “not yet been discussed by the ECB’s Governing Council,” and it is “wrong to speculate on the shape of future ECB interventions.” It didn’t deny that ECB officials are considering the idea.

A successful ECB plan could help shelter Spain and Italy from any further turmoil from Greece as governments send mixed signals about their willingness to stump up more funds.

Greece’s troika of international creditors -- the ECB, the European Commission and the International Monetary Fund -- will return to Athens in early September to assess progress as the Samaras administration seeks to hammer out 11.5 billion euros ($14.2 billion) in budget cuts for 2013 and 2014.

Greek Shortfall

Greece may need to cut as much as 14 billion euros over the next two years to meet its deficit targets due to setbacks in planned privatizations and lower tax income, Spiegel reported separately, citing an interim troika report. An IMF spokeswoman based in Washington declined to comment.

German Finance Minister Wolfgang Schaeuble said on Aug. 18 that the debt crisis mustn’t become a “bottomless pit” for his country. “There are limits,” he said, ruling out another aid program for Greece. At the same time, two German lawmakers said last week that Merkel is considering easing Greece’s bailout terms.

The Bundesbank has resisted ECB intervention during the crisis before. Former President Axel Weber resigned last year after becoming isolated over his opposition to the ECB’s original bond-buying program. Former Bundesbank vice president Juergen Stark also left his position as ECB chief economist in December in protest at the purchases, which were shelved in March this year.

Bundesbank Isolation

“Nobody should try to create the impression that the Bundesbank or its president are isolated,” German ECB Executive Board member Joerg Asmussen told the Frankfurter Rundschau in today’s edition.

Asked if the Bundesbank’s concerns about the new bond program are justified, Asmussen said the ECB acts within its mandate to guarantee price stability. “A currency can only be stabile if there are no doubts about its survival,” he said. “We’re working on that in the ECB.”

In today’s bulletin, the Bundesbank also said there are risks associated with a plan to give the ECB oversight of European banks.

The new system should theoretically cover all European Union banks with the possibility for countries to opt out, to minimize regulation arbitrage, the Bundesbank said.

That the ECB should be primarily responsible for the new authority “bears however the risk of conflict with the primary goal of monetary policy, that price stability should be guaranteed,” it said.

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net


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