European Central Bank President Jean-Claude Trichet indicated the bank’s decision to buy government and private bonds wasn’t supported by all 22 Governing Council members.
“On some of the decisions there was unanimity, I won’t give details, and on some there was an overwhelming majority,” Trichet said in an interview with Bloomberg Television today in Basel, Switzerland. “On bond purchases we had an overwhelming majority.”
The ECB announced overnight it will buy government and private bonds as part of an historic bid to rescue the euro after Greece’s fiscal crisis spread to other indebted nations in the currency bloc. The move came in tandem with the unveiling by European finance ministers of a loan package worth almost $1 trillion. ECB council member Axel Weber said today that purchases of sovereign debt pose “significant risks” and that he’s “critical” of that aspect of the central bank’s contribution.
“The ECB has crossed the line, a line that some members thought the bank would never ever cross in its entire life,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “I’m not surprised that it was not unanimous.”
Trichet denied the bank was pressured into the move.
“This decision is a decision of the Governing Council and not a result of any kind of pressure of any sort,” Trichet said at a press conference in Basel after a regular meeting of central bankers from around the world. “We are fiercely and totally independent.”
He confirmed the euro region’s 16 national central banks started buying bonds today and declined to give details on the scope of the program.
The euro and global stocks rallied on news of Europe’s rescue package, and yields on Greek, Portuguese and Spanish government bonds fell from their highs.
Investors cited the ECB’s initial refusal to consider asset purchases as one reason for the May 7 rout in global markets, which included U.S. stocks falling the most in 14 months amid concern Greece’s woes were spreading.
The central bank acted in concert with governments after markets targeted European economies with the weakest public finances. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds last week surged to the highest level since the euro’s 1999 introduction.
“We analyzed the situation,” Trichet said in today’s interview. “We decided to intervene and to re-establish a more normal functioning of this market in order to be sure that we had an appropriate monetary-policy transmission.”
Trichet said on May 6 that the ECB hadn’t discussed buying government bonds to stem the crisis. Weber, who as head of Germany’s Bundesbank oversees Europe’s largest economy, said on May 5 that the threat of contagion from Greece didn’t merit “using every means.”
In an interview with Germany’s Boersen-Zeitung newspaper published today, Weber said: “The purchase of government bonds poses significant stability risks and that’s why I’m critical toward this part of the ECB council’s decision.” The Bundesbank confirmed the comments.
“Market movements in the last few days had highlighted the risk that self-fulfilling panic might set in, and the ECB needed to be ahead of the market,” said Marco Annunziata, chief economist at UniCredit Group in London. Still, “the ECB’s move will raise serious questions about its independence,” he said.
While the euro’s founding treaty bans the ECB from buying bonds directly from governments, it can do so in the secondary market.
Trichet said the ECB will “sterilize” the liquidity it injects, possibly by using “term deposits.”
The bank could issue its own short-term paper, such as certificates of deposit, said Cailloux. He said that ECB Executive Board member Juergen Stark and Luxembourg central banker Yves Mersch were probably also among council members opposed to bond purchases amid concern an unchecked increase in the amount of money in circulation could fan inflation, the containment of which is the ECB’s main aim.
“This purchase program is not meant to up the overall amount of liquidity,” said Elga Bartsch, chief European economist at Morgan Stanley in London. “Longer-term inflationary dangers should be more contained. But it will remain to be seen whether the markets come to this conclusion too.”