Weber's Bond Warning Comes Back to Haunt ECB as Ireland Baulks at Bailout
Bundesbank President Axel Weber
Hannelore Foerster/Bloomberg
Bundesbank President Axel Weber.
Bundesbank President Axel Weber. Photographer: Hannelore Foerster/Bloomberg
Nov. 17 (Bloomberg) -- David Blanchflower, an economics professor at Dartmouth College and a former Bank of England policy maker, discusses Ireland's talks with the European Union about a possible bailout for the country's banks. Neel Kashkari, head of new investment initiatives at Pacific Investment Management Co., also speaks. They speak with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Nov. 17 (Bloomberg) -- Craig Barrett, chairman of the Irish Technology Leadership Group, discusses Ireland's need to invest in its educational institutions to spur innovation and startup companies. Barrett, former chief executive officer of Intel Corp., speaks from Limerick, Ireland, with Margaret Brennan on Bloomberg Television's "InBusiness." (Source: Bloomberg)
Six months after Bundesbank President Axel Weber opposed the European Central Bank’s decision to start buying government bonds, the risks he warned about may be materializing.
Ireland’s reluctance to accept a European Union bailout has forced the ECB to step up its bond purchases and lend more money to the country’s banks. The danger, first raised by Weber in May, is that the ECB erodes its independence by financing debt- strapped nations and keeping banks on life support as Europe’s debt crisis persists.
“If stress rises, the ECB will have to jump in,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “But the ECB does not want to again become an active buyer of peripheral debt or take a lot more risk onto its balance sheet. Weber wanted to avoid exactly that.”
The ECB has pressed EU governments to find a solution to the Irish crisis over the past six days. In a sign of growing concern in the ECB’s Eurotower in Frankfurt, Executive Board members this week urged Ireland to accept a bailout and re- stated the bank’s intention to proceed with the withdrawal of stimulus measures.
EU aid for Ireland “would stabilize the situation,” ECB Vice President Vitor Constancio said yesterday. Board member Juergen Stark said the ECB “will continue” to phase out its emergency measures after the end of the year.
Contagion Risks
“There is a serious risk of contagion and the ECB doesn’t want to have to clean up a European banking mess a second time around,” said Juergen Michels, chief euro-area economist at Citigroup Inc in London.
Irish and Portuguese 10-year bond yields rose to euro-era records last week in the second stage of a sovereign debt crisis that was sparked by Greece a year ago. They were at 8.12 percent and 6.69 percent respectively last night. Greek 10-year yields are over 11 percent.
The renewed tensions forced the ECB to ramp up bond buying, settling 1.07 billion euros ($1.45 billion) of purchases last week and 711 million euros the week before after three weeks of inaction.
Irish banks are also borrowing more from the ECB via its emergency facilities. ECB lending to Irish institutions rose 7.3 percent last month to 130 billion euros.
ECB President Jean-Claude Trichet tore up the central bank’s rule book in May, agreeing to prolong emergency lending to banks and purchase government bonds for the first time as Greece’s meltdown threatened the survival of the euro.
Out on a Limb
While winning plaudits at the time for his pragmatism, a lack of will from governments to push through tougher sanctions on deficit-rule breaches has left the ECB out on a limb, said Carsten Brzeski, an economist at ING Group in Brussels.
“Trichet and the ECB have acted way beyond their call of duty in this whole crisis,” said Brzeski. “It’s not the ECB’s duty to prop up insolvent banks or states. The problem for Trichet is that he is expected to clean up the politicians’ mess.”
Weber’s outspoken opposition to the ECB’s bond purchases reportedly drew the ire of French President Nicolas Sarkozy, fueling speculation he had damaged his chances of becoming the ECB’s next president when Trichet’s term ends in a year.
Some economists say Weber is misguided and the ECB should ramp up its asset-purchase program, currently worth just 65 billion euros, to prevent the debt crisis from spreading.
Bond Purchases
“They need to start buying Spain before that starts blowing up,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London, who called for the central bank to spend at least another 100 billion euros on bonds. “The issue of contagion doesn’t seem to have filtered through to the ECB.”
Support for Weber’s stance may nevertheless be growing within the ECB as policy makers are confronted with the “stability risks” he spoke of in May, said James Nixon, co- chief European economist at Societe Generale SA in London.
“Weber’s point was always that the central bank shouldn’t get involved with financing sovereigns, and that you shouldn’t blur the line between monetary and fiscal policy -- and that is what the ECB is now doing,” Nixon said. “I suspect there is quite a lot of support for Weber’s position beginning to gather.”
‘Not the Hostage’
The ECB can’t always provide the rear-guard defense for troubled governments and banks, council member Yves Mersch told Die Welt newspaper in an interview published yesterday. While it’s up to Ireland to decide whether to ask for EU aid, “the ECB will also review its risk management,” and its exit strategy is “not the hostage of others,” Mersch said.
The ECB’s tough talk “increases the pressure on the peripheral countries to accept a deal,” said Gilles Moec, an economist at Deutsche Bank AG in London.
Ireland has so far said it won’t ask for money when European and International Monetary Fund officials arrive in Dublin today to begin talks on the banking system’s needs. Trichet, who speaks in Frankfurt at 2:30 p.m. today, has yet to comment on a potential Irish bailout.
“The financial issues have become fiscal issues and these are simply not issues for the ECB,” said Julian Callow, an economist at Barclays Capital in London. “They are a challenge too far.”
To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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