Draghi's Promise: German Opposition to ECB Bond-Buying Plan Mounts
Many are yearning for a European Central Bank "bazooka" to solve the euro crisis. But ECB President Mario Draghi's proposal to resume the bank's bond-buying program in conjunction with the euro rescue fund is controversial. German politicians are particularly wary.
European Central Bank President Mario Draghi didn't mince words last week. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," Draghi said at a conference in London.
Now the ECB is zeroing in on a strategy to fulfil that promise, Germany's Süddeutsche Zeitung reported on Thursday. According to the Munich-based daily, the ECB is planning to restart its program of buying bonds on secondary markets from struggling euro-zone member states in order to push down their borrowing costs. In addition, Draghi will reportedly propose that the permanent euro-zone rescue fund, the European Stability Mechanism (ESM), be allowed to buy sovereign bonds on the primary market once it goes into effect.
Draghi is expected to comment on the proposals on Thursday afternoon at a press conference following the ECB's monthly policy meeting. Concrete details of his plan, however, will likely have to wait. A final decision on whether to allow the ESM to buy sovereign bonds won't made before September when EU leaders gather.
Finnish Prime Minister Jyrki Katainen also hinted on Thursday that European leaders were moving forward on a plan to have the permanent rescue fund jump into the sovereign bond market. "We have to find a way to use the (ESM) more efficiently, for example by buying state bonds on the primary market," Katainen told the Italian paper Repubblica. "That would go straight at the problem, lowering spreads more strongly." He also said that such an idea has been under consideration for the past two years.
Pushing Down Interest Rates
The new proposals come in response to rising concern over the fate of the euro zone this summer. Spain in particular has European leaders worried, with the country's borrowing costs remaining stubbornly high despite a recent EU bailout of struggling Spanish banks. On Thursday, Madrid was able to successfully auction off just over 1 billion worth of 10-year bonds at a rate of 6.64 percent, close to the 7 percent limit that economists say is unsustainable in the long term.
According to the Süddeutsche, Draghi envisions the ECB and ESM working together, with the ECB moving to buy up bonds on the secondary market prior to auctions to push down interest rates. The ESM would then buy on the primary market as needed to further lower or stabilize the rates. The plan has the advantage of limiting ESM expenditures as much as possible, which is important because the fund will only achieve its envisioned 700 billion volume over time. The temporary fund, the European Financial Stability Facility (EFSF), only has 148 billion in funding left.
Draghi, of course, has little choice but to provide further details about how exactly the ECB plans to respond to the worsening crisis. His pledge last week has raised expectations, and if he fails to deliver, market response could be painful.
Still, his bond-buying plan is far from uncontroversial. For one, some have criticized that it comes perilously close to providing countries the kind of direct aid that the ECB is prohibited from granting. As such, bond-purchasing programs could ultimately endanger the ECB's independence, say critics.
Germany's central bank, the Bundesbank, has been particularly wary of the bond-buying program, which has already resulted in 211 billion worth of shaky bonds on the ECB's books. Bundesbank head Jens Weidmann is concerned that the program rewards countries without requiring them to take any consolidation measures in return.
Draghi's plan could also put German Chancellor Angela Merkel in an uncomfortable position. Many conservative politicians in the country are opposed to aid that does not come paired with either additional austerity measures from the countries in need or further steps toward greater EU oversight of both national budgets and Europe's banking system. Already faced with signs that the euro crisis is weakening her government, the chancellor is not likely to be interested in angering coalition lawmakers further.
Indeed, several parliamentarians from her center-right Christian Democrats (CDU) on Thursday criticized the plan. Wolfgang Bosbach, a notorious skeptic of efforts to save the euro, said that "the problem is constantly climbing sovereign debt" in an interview with German public broadcaster ARD. "If we take away the pressure provided by high interest rates, then the willingness to make needed reforms disappears as well," he added.
Hans Michelbach, the senior conservative member of German parliament's Finance Committee, demanded in an interview with the financial daily Handelsblatt that the ECB be explicitly banned from buying sovereign bonds on the secondary market. "The central bank under the leadership of Mario Draghi has pursued increasingly adventuresome contortions to get around the prohibition against state financing," he told the paper.
Alexander Dobrindt, general secretary of the Christian Social Union, Bavarian sister party to Merkel's CDU, likewise criticized Draghi's idea. "If the ECB buys sovereign bonds, it would be akin to state financing through the back door. The ECB would be leaving the path of monetary stability," he told the mass-circulation daily Bild.
The influential tabloid also launched a campaign of its own to convince Draghi not to pursue his bond-purchasing plans. Earlier this year, the paper gave the ECB president a Prussian spiked helmet from 1871 to encourage him to impose Prussian-style discipline on the central bank. In an article on Thursday, however, the paper wrote: "Even more ECB billions for indebted countries? Then Bild wants its helmet back!"
cgh -- with wire reports
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