May 14, 2015 / 3:05 PM / 4 years ago

UPDATE 2-German Bundesbank chief rips into ECB over Greek loans

* Weidmann criticises provision of emergency funds to Greece

* Questions ECB’s bond-buying programme

* Says has a good working relationship with Draghi (Adds detail, quotes)

By Michelle Martin

BERLIN, May 14 (Reuters) - The head of Germany’s Bundesbank ripped into the European Central Bank on Thursday, saying emergency funding for Greek banks broke the taboo of financing governments and it was not up to central banks to decide who was or wasn’t in the euro zone.

Jens Weidmann also said it was questionable whether money printing by the ECB to boost the euro zone economy and halt deflation was necessary.

Greek banks have been drawing emergency liquidity assistance (ELA) from the country’s central bank, a funding lifeline provided in exchange for collateral. They have used some of this emergency funding to buy Greek government debt, indirectly helping to keep the county afloat.

The ECB has been raising the cap on the funds weekly, most recently on Tuesday by 1.1. billion euros to 80 billion euros.

“Given the ban on monetary financing of states, I don’t think it’s ok that banks which don’t have access to the markets are being granted loans which then finance the bonds of their government, which doesn’t have access to the markets itself,” Weidmann told German newspaper Handelsblatt according to advance extracts of an interview to be published on Friday.

Asked whether he would be prepared to stop emergency funding to Greek banks and therefore force Athens out of the euro zone, Weidmann said central banks were not responsible for “the make-up of the euro zone or granting aid payments”.

Weidmann, himself a member of the ECB’s Governing Council, said the decision about Greece’s future in the single currency bloc was “clearly” in the hands of politicians.

He said the ball was in Greece’s court now and Athens should submit convincing reform proposals quickly. While further funds had bought time, he said, they had not improved Greece’s competitiveness or produced a functional administrative structure.

He warned against putting too many demands on the central bank, saying it was “not omnipotent” and he was concerned about the increasing politicisation of central banks and the growing expectations placed on them. He said the ECB would not be in a position to solve Europe’s problems.

Weidmann also hit out at the ECB’s bond-buying scheme known as quantitative easing (QE), saying: “The question remains whether the QE programme was really necessary given our primary aim of price stability and how we should assess the risks and side-effects that inevitably come with such a scheme.”

If it had been his choice, he said, the volume of the trillion-euro-plus QE programme would have been “zero”.

He said QE made Eurosystem central banks the biggest creditor of governments and monetary and fiscal policy were becoming increasingly interconnected.

“That can increase the political pressure on central banks when it comes to future monetary policy decisions, especially as member states’ drive to reform is also being weakened.”

Weidmann, one of the strongest critics of the ECB’s exceptional monetary policy measures, said he had “a good working relationship” with its president, Mario Draghi.

“It’s not about solving personal conflicts as they don’t even exist,” he said. “It’s about discussing content.” (Reporting by Michelle Martin; Editing by Tom Heneghan)

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