FRANKFURT (MNI) – The European Central Bank and its major
underwriter Germany appear to be on a collision course following the
resignation of Executive Board member Juergen Stark, just as the latest
figures show that the ECB continued its heavy bond buying last week.
In its latest release, the ECB said it had settled a little under
E14.0 billion worth of bond purchases in the week ending September 9, a
tad above last week’s E13.3 billion. That brings to E143 billion the
total volume the ECB has bought since it launched its Securities Market
Programme in May 2010. The latest weekly figure was in line with
estimates.
In early August, the ECB renewed its bond market interventions in
an attempt to ease pressure on the funding costs of Spain and Italy, as
confidence in their ability to cut fiscal deficits pushed their
financing costs unnervingly higher.
The ECB’s bond market operations are viewed with deep suspicion
within conservative German circles, where the policy is seen as a breach
of the bank’s mandate and a reward for fiscally reckless member states.
The question being asked by market participants now is how long
the bank can pursue its policy of trying to prevent a meltdown in
sovereign bond markets when the Eurozone’s largest member remains
bitterly opposed to the strategy.
Those who doubt deteriorating state of relations between ECB
President Trichet and German public opinion need only recall his
performance during last Thursday’s rate setting meeting.
When asked about recent German criticism of the bank’s bond
purchasing programme, Trichet went on the attack, saying the ECB’s
record in providing price stability was “impeccable,” indeed better than
the highly revered Bundesbank before it, and that Germany should applaud
the ECB’s record.
The ECB delivered more price stability to Germany in the last 13
years than the country saw in the 50 years after the second World War,
Trichet asserted.
The problem facing the ECB is that if it bows to German pressure
and stops its sorties into the bond market, financing costs for Italy
and Spain could soar, with potentially dangerous consequences. But if it
continues the bond buys, especially in the light of Stark’s departure,
it might well aggravate the already negative sentiment emanating from
Germany.
Trichet and his incoming successor, Bank of Italy head Mario
Draghi, have said the SMP program is temporary and that governments
should not count on it continuing. Rather, they say, governments must
quickly act to get their deficits under control.
The ECB hopes above all else that governments can pass the
legislation that will allow the EFSF to take over the role of bad bank,
allowing the ECB to return to more traditional functions.
Despite the sharp barbs being directed at the ECB, it is the only
institution that still has any teeth and the market knows this.
The G7 meeting in Marseilles over the weekend was a non-event. G7
members acknowledged the need for a “concerted effort,” but they fell
short of any specific measures, an outcome that was pretty much
expected.
Meanwhile, there are signs of a potential liquidity squeeze, with
short-term money market rates showing elevated stress levels. With E182
billion deposited at the ECB’s overnight facility, a two-year high, the
interbank lending market remains under enormous stress.
At the same time, the abundance of liquidity provided by the ECB
through its full allottment programme is still continuing to exert
downward pressure on short term rates, with 3-month euribor falling to
1.528% from 1.53% on Friday.
Elsewhere, the massive flattening in the spread between 2-year and
10-year German debt instruments continued, as yields on the long end
were again pushed sharply lower in an investor flight to safety.
Speaking in Basel today, Trichet again reiterated his commitment to
provide liquidity as and when required by banks.
Eurozone banks have eligible collateral totaling about E4 to E5
trillion, which they can present to the ECB in return for loans, Trichet
said, noting that current demand for financing from the central bank is
only around E500 billion.
For the time being, the ECB looks likely to continue with its SMP
programme, but given Berlin’s mounting concern, Draghi, in attempt to
smooth relations, may feel some pressure to tone down or even halt the
operations.
— Frankfurt bureau: +49-69-720-142; email: frankfurt@marketnews.com —
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