ECB's Weidmann opposes boosting bond buys, coy on IMF

Wed Dec 14, 2011 6:03am EST

Related Topics

* Dismisses idea of unlimited ECB bond purchases

* Says EU summit agreements go in right direction

* Says absurd to think of return to D-Mark

* Says Buba will only release funds for IMF if other big donors do too

* Says monetary policy expansion, ECB has sufficient policy instruments

By Paul Carrel and Sakari Suoninen

FRANKFURT, Dec 14 (Reuters) - European Central Bank policymaker Jens Weidmann reiterated his opposition to the central bank ramping up its bond purchases and said his Bundesbank would only provide fresh funds for the IMF to help fight the euro zone crisis if countries beyond Europe do so too.

The ECB's mandate prevents it from embarking on unlimited bond purchases and past experience showed this would inevitably lead to inflation anyway, Weidmann said, resisting pressure for the bank to unleash unlimited intervention.

"I think the idea is astonishing that one can win confidence by breaking rules," he told journalists over a dinner of guinea fowl late on Tuesday at the Bundesbank's fortress-like Frankfurt headquarters.

The ECB has come under pressure from the United States and Britain in recent weeks to play a bigger role in fighting the euro zone crisis, and even some politicians in the 17-country bloc want it to act as a lender of last resort to governments.

Weidmann said EU leaders reached "agreements that go in the right direction" at their summit last week but the ECB could not as a result be expected to go beyond the limits of its mandate by ramping up its bond purchases.

"I do not share this logic," he added.

The leaders, who agreed to draft a new treaty for deeper economic integration in the euro zone, were right to tackle the roots of the crisis rather than look for a "bazooka" or "nuclear solution", said Weidmann, who was Chancellor Angela Merkel's economics advisor until he took the Bundesbank helm in May.

He stressed the importance of euro zone policymakers keeping up credibility, adding: "If an egg is broken, it is very hard to put it back together again -- and we are seeing that now in the currency union."

The measures agreed by European leaders to strengthen fiscal discipline have not convinced financial markets the debt crisis will be resolved.

But Weidmann stuck to his message that the way to address the crisis was for governments to clean up their budgets, pursue structural reforms to improve their competitiveness, and improve the euro zone's architecture.

Asking the ECB to do more to help debt-laden governments was like giving one last drink to an alcoholic, the Bundesbank chief said.

"It is like an alcoholic saying that I need to get a bottle tonight," Weidmann said.

"Starting tomorrow I will be clean and abide by the rules, but I need the bottle tonight. I don't think it is sensible to give the alcoholic the bottle. He won't have an incentive to solve the problem."

NO 'PLAN B'

Weidmann dismissed the possibility of a euro zone break-up.

"I want to make clear, in case someone feels nostalgic, that thinking of a return to D-Mark would be fully absurd."

"There are no such plans and they are nonsensical ... we are working to keep the euro as a stable currency," he said. "There is no Plan B."

One measure European leaders agreed last week was for EU countries to provide up to 200 billion euros in bilateral loans to the International Monetary Fund to help it tackle the crisis, with 150 billion euros coming from euro zone countries.

However, Weidmann said in a letter obtained by Reuters on Tuesday that the Bundesbank is only willing to provide further resources to the IMF as part of a solution to the euro zone debt crisis if other EU and non-EU countries do the same.

He reiterated this position at the Frankfurt dinner.

"If, for example, the U.S. and other important donors say they will not participate, then, from our viewpoint, it will be uncomfortably close to state financing ... That's why the conditions we have formulated are so important," he said.

"If these conditions are not met, then we could not give our approval to these credit lines."

The euro zone crisis prompted ratings agency Standard & Poor's last week to put 15 euro zone countries, including Germany, on a watch for a potential downgrade.

Weidmann played down the significance of a potential downgrade for Germany.

"We have seen in recent times that the loss of triple-A rating has not led to an end of the world," he said.

S&P cut the United States to AA-plus from AAA in August.

Turning to the German economic situation, Weidmann said the Bundesbank expected growth of 0.6 percent in 2012, though he said expansive monetary policy and global growth would help the country's economy build steam later next year.

"Monetary policy is currently expansive," he said.

Asked about cutting rates further, he added: "We have sufficient instruments to act."

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.