The top German official at the European Central Bank (ECB) is to leave early due to a conflict with the bank's policy of buying euro zone government bonds to combat the currency bloc's debt crisis.
The ECB confirmed today that executive board member Juergen Stark, the central bank's chief economist, would leave by the end of the year once a replacement was found.
The euro fell, and shares tumbled in Europe and on Wall Street on the shock development, which laid bare the rift inside the central bank over the handling of the worsening debt crisis and could undermine German public support for the euro.
US stocks closed more than 2 per cent lower today amid discord within the ECB over how to deal with Europe's sovereign debt crisis. Stocks plunged over 2.5 per cent and bolstered the safe-haven draw of US government debt.
US Treasury debt prices rallied as investors stocked up on the ultra-safe securities in preparation for a weekend of potential financial instability in Europe.
ECB bond-buying has arrested bond market contagion to Italy and Spain that threatened to overwhelm the euro zone's defences in early August, buying governments time to work on political solutions to the worst crisis in the single currency's history.
Mr Stark's departure, almost three years before his term is due to expire in May 2014, may deepen the gulf between the ECB, which manages the currency of the 17-nation euro area, and German guardians of central banking orthodoxy.
German deputy finance minister Joerg Asmussen, a civil servant who has been at the heart of financial crisis management, will replace Mr Stark on the ECB's executive board, a source in Berlin said.
Former Bundesbank president Axel Weber, who had been the front-runner to succeed ECB president Jean-Claude Trichet when he retires at the end of next month, resigned and withdrew from the race in February in protest at the same policy, which critics see as improperly monetising government debt.
"Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president," said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to new Bundesbank chief Jens Weidmann.
"It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB."
Mr Trichet made an emotional defence of the bank's performance against German criticism at a news conference yesterday, angrily telling a questioner that the ECB's record of inflation fighting in Germany over the last 12 years had been better than the Bundesbank's.
Mr Stark was one of four members of the ECB's policymaking governing council that sources said voted against last month's controversial decision to revive the dormant bond-buying programme and start buying Italian and Spanish debt after the two countries' borrowing costs ballooned amid market fever.
Since then, the ECB has bought more than €35 billion in bonds, significantly reducing Italian and Spanish spreads over benchmark German Bunds, on top of the €76 billion in Greek, Irish and Portuguese bonds it has bought since May 2010.
Mr Trichet was in the southern French city of Marseille for a meeting of Group of Seven finance ministers and central bankers and was not available for comment.
Mr Stark's decision means Mr Trichet's designated successor, Bank of Italy governor Mario Draghi, will start his eight-year term in November with a mountain to climb to restore the central bank's credibility in Germany, Europe's biggest economy.
While most policymakers, including Mr Draghi, declined comment, Austrian ECB governing council member Ewald Nowotny, a policy dove, said the ECB's basic direction would not be affected by Mr Stark's departure.
German chancellor Angela Merkel made no comment on Mr Stark's departure but, two days after the German constitutional court upheld the legality of euro zone bailouts so far, she said the European Union would have to enact treaty changes to strengthen co-operation in the debt crisis.
The news added to uncertainty over the position of Greece, the country where the euro debt crisis began in late 2009.
A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance today with expectations of take-up by private creditors fluctuating amid fierce European pressure on Athens.
Banks and insurers were due to indicate whether they intend to join the bond exchange, part of a planned second international bailout package agreed in July which is in doubt due to Greece's failure to meet its fiscal targets.
Officials said they expect a take-up rate of about 70 per cent, well short of the original 90 per cent target, which would have seen €135 billion of Greek bonds maturing by 2020 swapped or rolled over in a global transaction.
The head of the Greek public debt management agency said responses had started coming in and looked positive. But he said no figure would be given on Friday or next week.
Greece had threatened to cancel the deal unless it got 90 per cent participation but is in no position to walk away as it already faces the threat of its EU partners blocking bailout loans if it does not improve its debt-cutting performance.
Germany and its north European allies made private sector involvement one condition for a second rescue of Greece by international lenders, but it is unclear how any shortfall will be met if participation is lower than initially forecast.
Markets are worried not only about the debt swap but also over an impasse in Athens' negotiations with the European Union and the International Monetary Fund, and the wider impact of the euro zone debt crisis for banks' solvency.
IMF managing director Christine Lagarde renewed her call to European countries to take urgent action to recapitalise banks at risk from their sovereign debt exposure.
Speaking before the G7 meeting, Ms Lagarde said: "In view of the heightened risks and uncertainties - and the need to convince markets - some banks need additional capital.
"We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis.
That is why action is needed so urgently so that banks can return to the business of financing economic activity." EU officials have publicly brushed off Ms Lagarde's call and dispute the IMF's estimates of banks' capital needs.
EU and IMF inspectors suspended talks and went home last week after Greece admitted this year's budget deficit would be well above the target set in its first €110 billion rescue programme and failed to present a draft 2012 budget.
European partners have since ratcheted up pressure on Athens, warning it will not get the next €8 billion tranche of loans due this month if it does not improve fiscal discipline.
Some senior politicians in Germany, the Netherlands and Finland have suggested Greece may have to leave the euro zone.
Governments in northern Europe are under pressure from public opinion angry at euro zone bailouts, fuelling support for populist eurosceptical parties such as the True Finns, Finland's main opposition party.
True Finns leader Timo Soini told Reuters Insider television Greece was bound to default and bailouts would only make matters worse by pouring in taxpayers' money to support "cheats".
"We think also that those countries that cannot follow the rules, they must exit the system. Or the other option is that countries like Finland, Holland, maybe Germany, leave because they cannot pay any more," he said.
Reuters
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