Germany moved quickly to dispel the perception that the European Central Bank is in ideological disarray in the midst of a galloping debt crisis by nominating one of its top crisis managers to the bank’s executive team.
The swift nomination of German junior finance minister Joerg Asmussen to the ECB’s six-person executive board came the day after Friday’s surprise resignation of Juergen Stark. Mr. Stark was Germany’s top official at the bank, its chief economist and its most forceful critic of purchases of the sovereign debt of Greece, Portugal, Spain, Ireland and Italy.
While Mr. Asmussen, 44, is also considered a monetary and fiscal conservative, he is considered more pragmatic that Mr. Stark and his appointment may reduce the ideological tensions within the bank when its crisis-fighting abilities are needed most.
Mr. Stark’s resignation rattled the markets on Friday and sent the euro on another downward trajectory. While he officially resigned for “personal reasons,” he was a staunch opponent of the ECB’s accelerated bond-purchase program, whose total has reached €135-billion ($183-billion), more than a third of which has been spent since early August.
Mr. Stark believed the purchases blurred the line between monetary and fiscal policy; threatened to damage the bank’s health by stuffing its portfolio with junk-rated debt; and discouraged highly indebted countries from putting their fiscal house in order.
In an interview with Frankfurter Allgemeine’s Sunday newspaper, Edgar Meister, a former director of the Bundesbank (Germany’s central bank), said: “His resignation is a wake-up call, perhaps the last warning. Politicians cannot misuse the central bank to finance governments, otherwise danger threatens – for the ECB as well as the euro.”
It is not known whether the ECB will keep buying sovereign debt at the same pace it has since August. But since Mr. Stark’s departure removes the prime critic of the purchases, the ECB will have more freedom to manoeuvre.
Mr. Asmussen studied economics at the University of Bonn, where he was a protégé of Axel Weber, who later became the president of the Bundesbank. Mr. Weber, who was touted as a candidate to replace Jean-Claude Trichet as the ECB’s president, resigned from the Bundesbank earlier this year. He too disapproved of the ECB’s bond purchases.
Mr. Asmussen, deputy to German finance minister Wolfgang Schauble, has been a key member of Germany’s crisis-management team since the 2008 collapse of Lehman Brothers.
Mr. Stark’s resignation came on the day that the Group of Seven finance ministers and central bankers met in Marseilles for private discussions on how to handle the debt crisis and protect the banks that own Greek debt if the country were to default.
While the ministers vowed to push forward with their austerity and growth-enhancement plans, the sense that Greece could not be saved pervaded the meeting. Canada’s Jim Flaherty openly acknowledged that Greece would probably have to leave the 17-country euro zone if its fiscal consolidation plan fails or is withdrawn. “It’s necessary for the Greek government to stay the course,” he said. “You know, the alternative is probably that they’d leave the euro.”
A G7 official from another country, who did not want to be identified, said Greece could be considered insolvent and would probably default at some point. Investors agree: The extraordinarily high cost of insuring Greek bonds suggests a greater than 90 per cent chance that Greece will not be able to meet its debt obligations.
The source said that a Greek default might cost the European banks that hold Greek debt about €100-billion in losses, assuming the bonds lose about 50 per cent of their value. While the amount seems high, most of the banks would probably be able to absorb the losses, he said.
European banks have been bolstering their capital bases and have been subject to stress tests, which measure their ability to withstand shocks such as sovereign defaults or deep recessions. Germany’s banks held $22.7-billion (U.S.) of Greek bonds at the end of 2010, according to the Bank of International Settlements, making them Europe’s biggest holders of such debt.