European Central Bank President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said.
Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, the officials said late yesterday on condition of anonymity because the talks are private.
Draghi’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the officials said. Further ECB rate cuts and long-term loans to banks are also up for discussion, one of the officials said.
The euro strengthened and U.S. stocks rallied, with the Dow Jones Industrial Average climbing above 13,000 for the first time since May.
Draghi is trying to put together a game changer in the battle against the sovereign debt crisis, and winning Weidmann’s support would enable him to present a united front to financial markets. Draghi flagged the intervention on July 26, saying the ECB will do whatever it takes to preserve the euro. The Bundesbank responded yesterday by reiterating its opposition to ECB bond purchases.
Draghi will speak with Weidmann before the ECB’s Governing Council convenes in Frankfurt on Aug. 2, the officials said. He has also reached out to other ECB policy makers in an effort to build consensus, they said. A Bundesbank spokesman declined to comment.
An ECB spokeswoman said in an e-mailed statement it is usual practice and nothing special for Draghi to meet or talk with members of the Governing Council. She declined to comment on the content of any talks.
They will take place against a backdrop of international financial diplomacy, with U.S. Treasury Secretary Timothy Geithner and German Finance Minister Wolfgang Schaeuble scheduled to meet July 30 on the North Sea island of Sylt.
Geithner is also scheduled to meet Draghi later that day in Frankfurt, the U.S. Treasury Department said in a statement yesterday.
The Treasury said the meetings will be closed to the press, with a photo opportunity before the Schaeuble meeting. A Treasury official with knowledge of the matter said Geithner and Schaeuble won’t hold a news conference after the meeting.
Draghi has already secured the endorsements of Germany and France for a plan to reduce bond yields in Spain and Italy, which are threatening the existence of the euro.
German Chancellor Angela Merkel and French President Francois Hollande echoed Draghi’s language after a telephone conversation yesterday, pledging to do everything to protect the single currency. The two largest euro-area economies are “bound by the deepest duty” to keep the 17-nation currency bloc intact, Merkel and Hollande said in a joint statement.
“German support increases the credibility of an ECB intervention immensely, as otherwise markets would have to fear a subsequent down-scaling of the policy action,” said Christian Schulz, senior economist at Berenberg Bank in London. “If the ECB is credible enough, bond yields would stabilize without the ECB buying many bonds at all.”
The yield on Spain’s 10-year bond dropped to 6.74 percent yesterday from 7.62 percent on July 24 as markets rallied on Draghi’s signal of ECB intervention.
While granting a banking license to Europe’s permanent rescue fund, the European Stability Mechanism, is a long-term aim of Draghi’s, it is not part of the immediate crisis plan, one of the central bank officials said.
ECB government bond purchases have seen two German policy makers quit the central bank.
Vocal opponent Axel Weber resigned as Bundesbank president last year and Juergen Stark, a former Bundesbank vice president, stepped down from his role as ECB chief economist at the end of 2011. Both complained that the bond program carried risks and relieved pressure on governments to enact reforms.
A spokesman for the Frankfurt-based Bundesbank said in a statement read over the phone yesterday morning that there haven’t been any changes in its position on bond purchases. The bank has repeatedly said in the past it views such buying critically because it blurs the line between monetary and fiscal policy, he said.
German Economy Minister Philipp Roesler said the ECB’s central task is price stability, not financing government debt, Neue Osnabruecker Zeitung reported. Supporting the euro by having the ECB buying bonds cannot be “a long-term solution,” the minister said, according to NOZ.
Greece’s problem is its government’s inability to carry out domestic changes, the newspaper cited Meister as saying in an interview. While advising against Greece being forced to exit the euro region, Meister called it “very difficult” to rebuild the country’s ability to pay its bills, FAS reported in a preview of an article for tomorrow’s edition.
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