FRANKFURT (MNI) – European Central Bank governing Council member
Jens Weidmann warned today that continued bond market interventions by
the ECB could undermine the central bank’s credibility, while weak
Spanish and Italian debt auctions this week showed that the thus far
successful program may have its limits.
In a clear rebuke of the ECB’s Securities and Markets Programme
(SMP), the head of the Bundesbank warned that in the long run, crisis
measures “will undermine the trust in central banks and monetary policy
must therefore roll back added risks it has taken on,” Weidmann said.
He also hinted that he would vote against any additional crisis
measures that may be considered by the Governing Council in the future.
“Decisions on additional risk-taking must be taken by governments and
parliaments. Only they are democratically legitimized to do so,”
Weidmann declared.
The Bundesbank president’s opposition to buying bonds, particularly
of countries not under a bailout program, has been well-known. His
outspoken criticism suggests that he will push hard to ensure that the
ECB ends the interventions as soon as the European bailout fund has the
capacity to buy bonds.
This view appears to have broad support on the Council and has been
endorsed by ECB President Jean-Claude Trichet. However, it is
questionable if market conditions will allow for a quick ECB exit.
There are concerns that the EFSF, with its limit of E440 billion,
might not be anywhere near as effective as the central bank, which at
least theoretically has unlimited capacity to driving down sovereign
borrowing costs.
While the EFSF’s remaining firepower still exceeds the E115.5
billion purchased by the ECB thus far, its funds are also earmarked for
recapitalization of banks and potential credit lines to troubled
countries, not to mention any additional bailouts that might be needed
in the future for the likes of Portugal, Ireland or Greece. This means
that the funds available for bond buys could be drained by other
measures that the EFSF will presumably be authorized to implement.
Daniel Gros, director of the Center for European Policy Studies
warned that the capital available to the EFSF is not sufficient to
stabilize markets. The fund “was sized to provide emergency financial
support only to small peripheral countries such as Greece, Ireland and
Portugal,” he noted.
Should the funding volume appear to be too small, markets would
quickly test the limit, analysts warn. But thus far, calls by central
bankers and by European Commission President Jose Manuel Barroso to
increase the size of the EFSF have met with resistance from key
governments including Germany and France.
Weak Spanish and Italian debt auctions suggest that even the ECB’s
intervention, which has succeeded thus far in suppressing yields, may
have its limits. Since reactivating the bond program, the ECB has bought
around E43 billion of mainly Spanish and Italian bonds, reducing yields
on both countries’ 10-year bonds from above 6% to about 5%.
But while borrowing costs declined in the auctions of both
countries, demand was feeble, reflecting negative sentiment towards
Eurozone government bonds.
“It shows that if you want to put the size up, you had better be
prepared for wider spreads,” said Gianluca Ziglio, a rates strategist at
UBS in London. “There is not much reason to go into this with the ECB
being the only buyer” in the secondary markets, said Harvinder Sian, an
interest rate strategist at Royal Bank of Scotland.
To keep the debt crisis in check may yet require the ECB top
continue intervening in the secondary market even after the EFSF has
started doing so. While the resistance on the Council against bond buys
may be growing, a significant majority nonetheless approved the latest
round of interventions and may still be ready to keep the program active
should EFSF buys fail to impress the markets.
–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com
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