Exclusive: Germans lead resistance to ECB bond buying

FRANKFURT Fri Aug 5, 2011 6:03am EDT

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FRANKFURT (Reuters) - Germany's Jens Weidmann and Juergen Stark led a four-man group who opposed the reactivation of the European Central Bank's bond-buying program, central bank sources said on Friday.

Bundesbank chief Weidmann and Stark, who heads the ECB's economics department, are ECB heavyweights whose opposition to firing up the program after 18 weeks of inactivity could restrict any push to broaden purchases to include Italy's bonds.

Traders said the ECB bought Irish and Portuguese government bonds after deciding on Thursday to revive the program.

"If that is the ECB response, it's like the fire brigade responding but driving to the wrong place," said Holger Schmieding, economist at Berenberg Bank. "It doesn't douse the fire and harms the credibility of the fire brigade."

Italy, whose 10-year government bond yields rose above their Spanish equivalent on Friday, is now in the eye of the euro zone storm and the size of its economy -- it a member of the G7 club -- means the whole single currency project is tied to its fate.

Another ECB Governing Council member, Belgium's Luc Coene, said on Friday the ECB could buy Italian and Spanish government bonds as long as these countries took measures to ease their budgetary problems.

Asked if once this work was done the ECB could buy the bonds, Coene said: "We already did it in the case of Greece, Portugal and Ireland, so I don't see why there would be let's say a sort of veto against that possibility."

His comments suggested there would be no imminent move on the part of the central bank to buy the debt of Italy and Spain, and tallied with the view of ECB President Jean-Claude Trichet.

Trichet said on Thursday it was necessary for Italy to frontload structural measures, when asked whether Italy was taking adequate steps to strengthen its public finances.

A 48-billion-euro austerity program passed by Italy's parliament last month delays the brunt of spending cuts until after a 2013 general election.

NORTH V SOUTH

The four dissenting votes show there is a nasty split on the ECB's 23-member Governing Council, with opponents from the euro zone's core keen not to let profligate governments in the periphery ease up on their debt-cutting efforts.

In addition to Stark and Weidmann, two central bankers from Benelux countries opposed the bond purchases, the sources said.

As president of Germany's powerful Bundesbank, Weidmann's opposition to the bond-buy program is crucial. He broke off his holiday to attend Thursday's policy meeting and will not be happy about the decision to intervene in the debt markets.

Weidmann took over the Bundesbank's presidency in May after his predecessor, Axel Weber, resigned and gave up the chance to lead the ECB after publicly opposing its bond-buying program.

As with Weber, Weidmann's opposition to the program stems from an aversion to taking risk onto the central bank's books and to monetizing government debt.

Weidmann will not do a Weber and resign but as president of the biggest of the euro zone's 17 national central banks he has a powerful voice Trichet cannot ignore.

(Editing by Mike Peacock)

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Comments (2)
Mumbojumbo wrote:
The Germans follow an excellent strategy of crisis prevention. The Eurocrats caused the crisis by their financial deregulation policies, instead of a facing a tribunal and a cut of their pensions they try to sell their snake oil which gets them even more power and competences. I don’t trust them at all. The EU broke their treaties, so they don’t have any credibility at all. You won’t give your money to a bankrupter.

Aug 05, 2011 7:58am EDT  --  Report as abuse
yahmed wrote:
its sad the Germans are bound by poor fiscal policy of other nations

Aug 06, 2011 8:22pm EDT  --  Report as abuse
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