Bundesbank concern at Irish deal

Bundesbank president Jens Weidmann, a member of the ECB governing council, said the promissory notes deal blurred the ECB's "clear line between monetary and fiscal issues". photograph: chris ratcliffe/bloomberg

Bundesbank president Jens Weidmann, a member of the ECB governing council, said the promissory notes deal blurred the ECB's "clear line between monetary and fiscal issues". photograph: chris ratcliffe/bloomberg

Sat, Feb 16, 2013, 00:00

Bundesbank president Jens Weidmann has voiced concern that Ireland’s promissory notes deal came perilously close to illegal monetary financing.

Last week the ECB “unanimously took note” of a plan to swap Anglo Irish promissory notes for sovereign bonds, easing Irish borrowing requirements by €20 billion.

Mr Weidmann, a prominent member of the ECB governing council, has now hinted the deal set a dangerous precedent by blurring the ECB’s “clear line between monetary and fiscal issues”.

“The transaction in Ireland demonstrates how difficult it is for monetary policy to free itself from the embrace of fiscal policy once you’re engaged,” he said to Bloomberg.

The Bundesbank is unhappy with what it sees as indiscreet statements by Irish politicians on the role played by various officials in reaching the agreement.

Annoyance

There is annoyance, too, that remarks in Ireland on the resulting cost savings only highlighted the legal questions surrounding the arrangement.

For his part, Mr Weidmann said that Irish remarks had “underscored the fiscal elements in this transaction”.

Article 123 of the EU treaty forbids the ECB from engaging in monetary financing. However many officials close to the deal have conceded that both the original promissory note deal and its successor arrangement did just that – or at least came very close.

Yesterday, Mr Weidmann reiterated his “strict” definition of monetary financing and urged EU leaders to “accept the limitations of article 123 for our actions”. “It’s not difficult from that to guess what my position is,” he said.

Last Wednesday evening, the German banker is understood to have held out against allowing a promissory notes deal. The Bundesbank head expressed concern about the legality of the liquidation of assets of IBRC. He is concerned at the monetary financing implications of the Central Bank of Ireland selling promissory notes that have been transformed into bonds.

Mr Weidmann said he was not “passing a legal judgment on a particular transaction”, but said the liquidation of IBRC had “repercussions” which the ECB would have to ensure conformed to its rules.

Monitoring

Echoing Mr Draghi last week, Mr Weidmann said the Irish arrangement would be re-examined.

Yesterday official sources said this would happen as part of normal ECB monitoring and the Bundesbank was not pushing for any special tests, nor did it want the deal reopened.

Mr Weidmann reiterated yesterday his concerns that the ECB was in danger of compromising its independence and credibility by becoming enmeshed in euro zone crisis politics.

His Bundesbank predecessor Axel Weber, as well as German ECB executive board member Jürgen Stark, resigned in protest at an ECB policy to buy bonds of crisis-hit euro members.

Irish officials have insisted that the Anglo promissory notes arrangement was a one-off, thus any concessions do not set a precedent for other crisis-hit euro members.

The Bundesbank takes another view, suggesting that special deals can awaken expectations, even if the situations are not identical.

Mr Weidmann said that a prospective bailout for Cyprus, expected to cost as much as €17.5 billion, should involve a “substantial bail-in component” from private creditors.

He ruled out further debt relief for Greece, saying that debate was reflected in the “last adjustment of the programme and its financing conditions”.

Meanwhile, ECB executive board member Jörg Asmussen has said it is “very important” that France reduce its budget deficit this year within the allowed 3 per cent ceiling.