Weidmann Says ECB Council Skepticism About Bond Buys Growing

Jens Weidmann
Jens Weidmann, president of the Bundesbank and governing council member of the European Central Bank (ECB), listens during a ceremony to mark the tenth anniversary of the introduction of the euro at the ministry of finance in Berlin on Dec. 14, 2011. Photographer: Michele Tantussi/Bloomberg

European Central Bank policy makers are becoming more skeptical about the efficacy of the bank’s bond-purchase program, ECB council member Jens Weidmann said.

“I am not a fan of the SMP,” Weidmann said at an event in Frankfurt last night, referring to the ECB’s Securities Markets Program. “The fans of the SMP are becoming increasingly skeptical.” The off-the-record comments were approved today for publication by the Bundesbank, which Weidmann heads.

With Italy and Spain needing to sell a combined 20 billion euros ($26 billion) of debt in January, according to Citigroup Inc., the ECB has come under pressure to step up its bond purchases to contain the debt crisis while politicians seek a longer-term solution. ECB policy makers including President Mario Draghi have emphasized the bond buying is “limited” and can’t return confidence to the market in the absence of government reforms.

The race against market demands to deploy ever larger weapons can’t be won, Weidmann said.

The ECB settled 635 million euros of bond purchases last week, the least since it restarted the program in August. Italy today had to pay the most in 14 years to sell five-year bonds as Parliament rushes to pass a 30 billion-euro budget plan that Prime Minister Mario Monti says will bring down borrowing costs.

Italian Bond Yields

The Rome-based Treasury sold 3 billion euros of the bonds, the maximum for the sale, to yield 6.47 percent, the most since May 1997 and up from 6.29 percent at the last auction on Nov. 14.

Italy “can live with interest rates over 7 percent for years” if needed, and the right approach is not more ECB bond purchases, Weidmann said. “Italy should be given the chance to show it can carry out” its fiscal reforms.

The ECB has spent 207.5 billion euros on government bonds since its purchase program began in May last year. The buying has split the 23-member Governing Council. ECB Executive Board member Juergen Stark, who says the purchases blur the line between monetary and fiscal policy, will step down at the end of the year.

In a speech in Berlin today, Weidmann said the idea that the ECB can solve the sovereign debt crisis by printing money must be laid to rest.

“The idea that the required money will be created through the printing press should finally be brushed aside,” he said. “Doing that would threaten the most important foundation for a stable currency: the independence of a price-stability focused central bank. This independence is lost when monetary policy is put into the service of fiscal policy and then loses control of prices.”

IMF Loan

Weidmann also took a tough line on lending the International Monetary Fund more money so that it can help debt-strapped euro-area nations if needed. The Bundesbank will only put up the cash if nations outside the euro area also contribute, he said.

European leaders agreed at a summit on Dec. 9 on additional resources of 200 billion euros for the IMF from euro-area and European Union members and invited “parallel contributions” from other nations. The U.S. has said it won’t participate.

The Bundesbank is ready to provide up to 45 billion euros “as long as there is a fair distribution of the burden amongst the IMF members,” Weidmann said. “If large members, for example the U.S.A., were to say ‘we’re not taking part,’ then from our point of view it is problematic.”

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