Germany holds firm on bond buying

Mon, Aug 20, 2012, 01:00

Germany's Bundesbank today stepped up its resistance to a European Central Bank plan to buy billions of euros worth of Spanish and Italian government bonds to reduce those countries' crippling borrowing costs.

The ECB is being forced to take a greater role in fighting the euro zone crisis while the bloc's governments negotiate legal and political hurdles to coordinating a longer-term response, but the Bundesbank wants to limit central bank action.

The ECB sought to quash speculation about the form of the new bond-buying plans as the Bundesbank kept up its opposition, even after German chancellor Angela Merkel voiced support for the ECB's crisis-fighting strategy last week.

The powerful Bundesbank, the central bank of Europe's largest economy, objects to ECB president Mario Draghi's plan to resume buying bonds on the grounds that this amounts to monetary financing of governments, contravening European law.

"The Bundesbank remains critical of the purchase of euro system sovereign bonds, which comes with considerable risks for stability," the Bundesbank said in the introduction of its monthly report, reflecting the views of its leadership.

"Decisions about a possible broader mutualisation of solvency risks should be ... with the governments and parliaments, and should not occur via central bank balances."

The Bundesbank retains substantial influence within Germany and on financial markets due to its inflation-fighting credentials but, as just one of 17 constituents at the ECB, it is unlikely it could scupper Mr Draghi's plan.

The euro fell after publication of the report , which came on Bundesbank chief Jens Weidmann's first day back at work following his summer holiday.

Policymakers are posturing over the programme ahead of a crunch ECB meeting on September 6th, at which markets will be looking for the central bank to spell out more details of the plan.

In Italy, industry minister Corrado Passera said Bundesbank criticism of the ECB plans "does not honour those who make them."

He said there had recently been an excess of "incoherent and disruptive communications which have also disturbed markets." Mr Draghi, an Italian, indicated earlier this month the ECB could intervene in debt markets but he held back from announcing concrete steps.

Reuters