Politeía Digest

Quis custodiet ipsos custodes?

Central Bankers in Europe Clash Over Bond Buys

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By Brian Blackstone

FRANKFURT—The European Central Bank refrained from purchasing government bonds last week for the first time since a controversial program aimed at shoring up shaky euro-zone countries such as Greece and Ireland began more than five months ago. The news, in a weekly update from the central bank, comes amid renewed strife between Germany’s top central banker, Axel Weber, and the rest of the ECB, including President Jean-Claude Trichet, over whether the program should continue.

ECB watchers find the timing of the latest flare-up puzzling because even before last week, buying had largely trickled to a near-standstill since early summer. Of the €63.5 billion ($88.7 billion) in bond buys since the ECB started intervening in markets in May, €60 billion was bought by early July.

An ECB spokesman had no comment on the future of the bond facility, though recent remarks by top ECB brass suggest last week’s pause shouldn’t be seen as signaling an imminent end.

However, the race to succeed Mr. Trichet in October 2011 is heating up, and the latest flap renews long-simmering questions about how effective Germany’s blunt-mannered Mr. Weber would be as head of an institution that sets monetary policy for an economically diverse set of 16 countries.

Mr. Weber’s strident opposition to the very type of program that France and other countries had pressed the ECB to engage in during the Greek crisis this year may make it tougher for Germany to secure political backing for the Bundesbank president.

That could boost the chances for another contender, Italian central bank head Mario Draghi, whose communications and diplomatic style is seen more in the mold of Mr. Trichet’s.

Mr. Weber last week used a high-profile appearance in New York to once again rail against the bond-purchase program, saying it hadn’t achieved its objective and should be “phased out permanently.”

His opposition dates back to May 10, the same day the ECB said it would start buying government debt in order to stabilize what it considered dysfunctional markets. Mr. Weber told a German daily within hours of the announcement that he viewed the program “critically” and that buying bonds posed “substantial” risks. That infuriated others on the ECB council who think such disagreements should be kept behind closed doors. Tensions persist, and that Mr. Weber continues to pound away at a program that is now largely symbolic suggests he is little concerned about his popularity within the ECB.

“It’s a matter of principle that shows he just completely dislikes the whole thing so much that he doesn’t care about his communications policy and the consequences this can have for his relationship with his colleagues on the Governing Council,” says Carsten Brzeski, economist at ING Bank.

Mr. Weber’s objections don’t appear to focus on future inflation risks, the usual worry when central banks buy assets. He acknowledged in last week’s speech that government bond purchases account for only about 3% of the ECB’s balance sheet, a fraction of what the Federal Reserve and Bank of England have bought in government bonds.

His concern now appears largely philosophical—that buying bonds of fiscally strapped governments “risks blurring the different responsibilities between fiscal and monetary policy.”

Mr. Weber’s colleagues on the ECB have struck back recently, signaling they don’t agree with his sense of urgency to wind the program down.

Jürgen Stark, a fellow German who sits on the ECB’s executive committee and shared some of Mr. Weber’s initial concerns, told the German daily Handelsblatt on Friday that the ECB will purchase bonds “as long as we consider necessary.”

In an interview published Sunday in the Italian daily La Stampa, Mr. Trichet said Mr. Weber’s opinion that the program should be scrapped “is not the position of the Governing Council” and that, as president, Mr. Trichet is the “porte-parole,” or spokesman, for the 22-member ECB.

Mr. Trichet almost certainly knew that the ECB hadn’t purchased any bonds last week when he reiterated the ECB’s support of the program over the weekend.

In a recent Wall Street Journal interview, Austria’s central bank governor Ewald Nowotny called the bond-purchase program a “safety belt” at a time of market unrest.

Source: WSJ

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Written by Theophyle

October 19, 2010 at 11:31 am

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