Bundesbank president on collision course with ECB over extending aid to euro zone banks

AXEL WEBER, Bundesbank president, has put himself on a collision course with other European Central Bank (ECB) policymakers by arguing publicly in favour of extending emergency help for euro zone banks until at least next year.

The comments by Germany’s central bank head were unusually forthright and suggested he wanted to assert his authority ahead of a decision next year on a successor to Jean-Claude Trichet as ECB president.

Mr Weber told Bloomberg Television, in an interview broadcast yesterday, that the ECB should continue providing unlimited liquidity on a weekly, monthly and three-monthly basis until at least the start of 2011.

Discussion on the ECB’s “exit strategy” would be “focused on the first quarter”, he said.

Other members of the ECB’s 22-strong governing council are likely to agree with Mr Weber’s cautious approach, which yesterday drove the euro lower, despite pre-empting discussions at the council’s next meeting on September 2nd. His comments “might perhaps be an irritation for . . . Trichet, who always stresses his prerogative as ECB president to be the ‘porte-parole’ [spokesman] of the council”, said Julian Callow, European economist at Barclays Capital.

Mr Weber is a possible candidate to succeed Mr Trichet, whose non-renewable eight-year term expires in October 2011. But it is not the first time his public statements have created waves.

In May, at the height of the euro-zone debt crisis, Mr Weber opposed the ECB’s emergency government bond-purchasing programme – and in yesterday’s interview dismissed the programme as having “played a minor role only”.

Diplomatic skills were not essential for an ECB president, Mr Weber told Bloomberg.

“It’s important to be a diplomat for the diplomatic corps. It’s not so important for a central bank,” he said.

“One of the central bankers I’ve always admired was Paul Volcker ,” Mr Weber said.

“You can call him anything, but not a diplomat.” The Bundesbank president refused to comment on whether he might succeed Mr Trichet.

After the collapse of Lehman Brothers in late 2008, the ECB pumped liquidity into the euro-zone banking system on an unlimited basis.

Mr Weber said the year-end period was “usually surrounded by some uncertainty regarding the liquidity situation” but he said “it’s clear we need to re-embark on a normalisation procedure”.

The ECB has pledged to keep supplying unlimited weekly and monthly liquidity until early October, but no three-month offers have been scheduled beyond the end of September.

Mr Weber said ECB’s growth forecasts were likely to be revised up next month following the 2.2 per cent rise in German GDP in the second quarter.

The Bundesbank and ECB yesterday had no comment on Mr Weber’s remarks. – (Copyright The Financial Times Limited 2010)