FRANKFURT (MNI) – European Central Bank Governing Council member
Mario Draghi’s warning against large scale government bond purchases by
the ECB leave little doubt that the central bank will not yield to
pressure from the International Monetary Fund or the markets to
significantly step up its interventions.
In an interview published in Friday’s Financial Times, Draghi said
that massive spending on government bonds could undermine the ECB’s
independence and break the European Union’s rules.
“I’m only too aware that we could easily cross the line and lose
everything we have, lose independence, and basically violate the [EU]
treaty,” Draghi, who also heads the Financial Stability Board, said.
Following the recent flareup of the sovereign debt crisis, markets
had speculated that the ECB might pre-announce a massive asset purchase
program a la Fed totaling E1 trillion or even E2 trillion over the next
months. Even the International Monetary Fund called on the central bank
to step up spending.
Draghi is not the first ECB policy maker to reject large-scale debt
purchases. Axel Weber has long warned that the Securities and Markets
Program is blurring the line between monetary and fiscal policies and
pushing the ECB dangerously close to monetizing fiscal debt.
Weber, however, is one of the Governing Council’s staunchest hawks
and he openly rejected bond buys categorically from the start in what
was widely seen as an act of disloyalty to the Council.
Coming from Draghi, who usually has a moderating influence on the
verbal discourse and generally keeps his cards close to his chest,
today’s comments are likely to be far more revealing of the general mood
on the Council — especially since Draghi allows for some bond buying to
ensure the effective transmission of monetary policy.
The ECB has certainly ratcheted up bond buys — to just under E2
billion in the most recent week — but that still disappointed market
expectations. According to traders, the ECB has been buying more
actively since then, but Draghi’s comments suggest that the new weekly
total released on Monday may remain well below the double-digit figures
seen at the outset of the program.
Instead of the ECB intervening more heavily in the bond market,
tensions should be calmed by decisive government consolidation efforts,
Draghi argued. “If communication is crisp, if policy action is firm and
if the commitment is perceived as persistent, markets are certainly not
going to be hostile to that,” he said.
His relatively strict stance may make Draghi more acceptable to
Germany as a successor to President Jean-Claude Trichet at the helm of
the ECB. Weber has long been seen as the frontrunner in the race to
succeed Trichet, but his polarizing manner — particularly on bond buys
— has made it increasingly difficult for the German government to lobby
for him effectively.
German Chancellor Angela Merkel, at a joint press conference Friday
with French President Nicolas Sarkozy in Freiburg, Germany, declined to
answer when asked if she supported Weber to be the next ECB president.
Sarkozy said the matter had not been discussed.
Council members also do not appear to believe that launching a
Eurobond, as proposed by Eurogroup President Jean-Claude Juncker and
Italian Finance Minister Giulio Tremonti, would be an appropriate
response to the current market tensions.
While Vice-President Vitor Constancio reiterated Thursday that the
ECB has “no official position” on the subject, Yves Mersch and Ewald
Nowotny suggested Friday that it is not a realistic option now, and that
the debate thus only serves to distract form needs to make key reforms.
In any event, with both Germany and France dead set against the
idea, it would seem to have virtually no chance of approval anytime
soon.
Enlarging the EFSF bail-out fund appears to be seen as the more
attractive option. “We already have an EFSF, and why not allow this
existing fund to be broadened in the scope,” Mersch said Friday.
Constancio on Thursday said that “if that size would be increased it
would be helpful for the problem of the sovereign debt crisis.”
Still, it is not quite clear how actively the ECB is currently
lobbying for an enlargement of the fund. Some, including Erkki Liikanen,
have argued that funds available are more than sufficient while
Executive Board member Lorenzo Bini Smaghi even suggested that enlarging
the fund may have adverse effects by inciting markets to test it.
In either event, Eurozone governments — again, Germany and France
— have indicated that they are not prepared to step up funding.
For its part, the ECB appears prepared to maintain its support for
weak banks within the Eurosystem even if it decides to phase out further
liquidity support measures, recent comments suggest.
“Concerns about the challenges that these banks may face when the
ECB proceeds further with the phasing-out of the enhanced credit support
measures remain acute,” the ECB said in its Financial Stability Report
on Thursday.
And Draghi told the FT that, “dealing with addicted banks is an
essential component of any exit strategy.”
He added: “We want to make absolutely sure that our monetary policy
is not going to be polluted by the addicted banks’ demands.” He warned
that their desperate need for money, those banks could drive up rates
excessively once the ECB resumed competitive bidding at its refinancing
operations.
Draghi said that “concrete proposals” to deal with this problem
were currently being discussed at the central bank but, but he refrained
from offering any details.
One potential option floated by analysts would be for the ECB to
open separate operations in which it continued to offer unlimited funds
at a penalty rate. Another option would be for national central banks to
provide emergency credit lines as Ireland’s central bank did recently
for Irish banks.
The “proposals” mentioned by Draghi could also refer to government
support action, but the ECB has thus far not been able to convince
national governments to sort out their weak banks. Carrying out
necessary restructuring and recapitalization would also take some time,
forcing the ECB to keep liquidity support in place longer than it may
want to given ongoing normalization in money markets.
It thus appears more likely that the ECB is moving closer to
introducing a two-tier refinancing system in the Eurozone, paving the
way for further withdrawal of liquidity support while sheltering banks
still addicted to central bank funds.
–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com
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