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The Globe and Mail

Bundesbank still opposed to ECB bond buying

European Central Bank (ECB) President Mario Draghi testifies before the European Parliament's Economic and Monetary Affairs Committee in Brussels July 9, 2012.


Germany's powerful Bundesbank issued a reminder that it still opposed sovereign bond purchases by the European Central Bank, dampening market optimism after ECB president Mario Draghi hinted he could act more decisively in the eurozone debt crisis.

Senior officials at the German central bank have long been critical of using ECB resources to buy the bonds of struggling countries such as Greece or Spain. The Bundesbank believes that this is against the spirit of the ECB's statutes, which forbid it to finance states. "There haven't been any changes" in this position, the bank said on Friday.

Mr. Draghi on Thursday raised hopes of such ECB intervention, saying his institution would do "whatever it takes" to halt the crisis. He argued the ECB could be justified in acting to curb excessive sovereign bond yields because they were a problem for its implementation of normal monetary policy.

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The euro fell on Friday, reversing strong gains following Mr. Draghi's comments.

Mr. Draghi, who has previously seemed less of an enthusiast for ECB bond purchases than Jean-Claude Trichet, his predecessor, did not explicitly say he would like the central bank to intervene again in secondary markets to buy bonds. But his arguments were similar to those the ECB used when setting up its bond-buying programme – known as the securities market programme – in 2010.

The Bundesbank signalled opposition to another potential policy that markets think the ECB could yet use to fight the crisis – allowing the euro zone's forthcoming €500-billion ($615-billion U.S.) rescue fund to get a banking licence so it could borrow if needed from the ECB.

This would also break EU treaty rules, the Bundesbank said.

While Bundesbank opposition is not fatal to any ECB action – no national central bank has a veto over ECB policy decisions, which are voted upon – in practice German resistance is a problem.

Germany is the biggest shareholder in the ECB by dint of the size of its economy, and Mr. Draghi has gone out of his way during his first year in office to reassure concerned German taxpayers, emphasising his commitment to the ECB's mandate to maintain the stability of the euro.

The ECB has more than €210-billion of member states' sovereign debt on its books after more than two years of bond purchases. It has never detailed the holdings, but most analysts assume it began by buying up Greek debt and then acquired debt issued by other "peripheral" countries including Spain, Portugal and Italy.

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The program has been in effect frozen for months, reinforcing the impression that Mr .Draghi would prefer another crisis-fighting tool.

Some analysts think ECB bond purchases are counter-productive because they make private debtholders worry about being pushed down the queue to be repaid, behind the central bank, in the event of a sovereign default.

Axel Weber, Bundesbank president, resigned last year – partly because of opposition to ECB bond purchases – and his successor Jens Weidmann has voiced criticism of the policy.

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