Berlin dismisses reports of plan to buy up bank debt

Thu, Jun 21, 2012, 01:00

BERLIN HAS dismissed as “simply wrong” reports that it was ready to permit a large buy-up of Spanish and Italian banking debt to ease euro zone market pressures.

Chancellor Angela Merkel said she had “heard nothing of such things” at the G20 meeting in Mexico, while her officials described such reports as “wishful thinking”.

“There are no concrete plans that I am aware of but there is the possibility for the EFSF and ESM [bailout funds] to buy sovereign bonds on the secondary market, but with strict conditionality,” said Dr Merkel. “But that’s a purely theoretical situation.” A government spokesman in Berlin said there would “never be any kind of buy-up without conditions”.

Germany has long opposed bond buy-ups for political but also financial reasons, fearing it would be left holding the greatest share of potential losses.

The speculation that its position was shifting began after briefings to that effect by British officials in Mexico and was driven on further by remarks by Italian prime minister Mario Monti.

He said he could envisage allowing the EFSF or ESM to buy up Italian sovereign bonds to push down their interest rates. “To stabilise the financing costs for countries that meet their reform calendar,” he said, “this has to be differentiated clearly from the concept of rescues”.

It was unclear whether Mr Monti was referring to direct purchase of bonds or indirect buy-up on the so-called secondary market.

Several participants insisted a buy-up proposal was discussed on the margins of the two-day G20 summit in Los Cabos, Mexico.

US treasury secretary Timothy Geithner said euro zone leaders would “put in place a set of measures” at their upcoming summit to “make sure that the countries that are undertaking these reforms, like Spain and Italy, can borrow at existing low interest rates”.

IMF managing director Christine Lagarde suggested the “seeds of a pan-European recovery plan” had been planted at the G20 summit.

European leaders committed to take all measures necessary to safeguard the integrity and stability of the euro area and “break the feedback loop between sovereigns and banks”.

A spokesman for EU economics affairs commissioner said yesterday no application for such negotiations had yet been filed and said there was no indication that it would be discussed at next week’s EU summit.

The spokesman pointed out that such buy-ups only calmed the markets for a short time and were more a “financial painkiller” for short-term relief.

There was no cure-all beyond deep-seated structural reform, the spokesman added.