Weber Says ECB Should Phase Out Bond Purchases `Now'
European Central Bank Governing Council member Axel Weber said the ECB should stop its bond- purchase program, threatening to remove a lifeline for European governments and banks trying to shore up their finances.
“These securities purchases should now be phased out permanently,” said Weber, who also heads Germany’s Bundesbank, in a speech delivered in New York yesterday. With policy makers debating when to withdraw other emergency measures, Weber said the risk of “exiting too late” is greater than the danger of “exiting too early.”
The remarks, the strongest from any ECB official advocating a removal of stimulus, came as governments and banks in Ireland, Portugal and Greece struggle to convince investors they can fix their budgets and balance sheets in the aftermath of this year’s sovereign debt crisis. The intervention may also influence some European leaders as they decide who to appoint as the next ECB president when Jean-Claude Trichet retires next year.
“His comments certainly didn’t do his ambitions for the ECB presidency any favors,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc, in London. “At the same time, he is being true to himself and he is speaking as the president of a central bank in a country where the economy is booming and where interest rates are far too low.”
European bond markets were closing as Weber’s remarks were published at 6 p.m. Frankfurt time. The euro was little changed and traded at $1.3870 at 8:07 p.m. in Frankfurt.
The ECB started buying bonds in May as part of a European Union-wide push to rescue the euro after the Greek crisis threatened to undermine the 16-nation currency bloc. The purchases, criticized by Weber on the day they were announced, aimed to smooth the functioning of European bond markets, which were roiled as investors speculated on whether Greece, Ireland and Portugal would default on debts.
That didn’t stop the extra yield that investors demand to hold Irish and Portuguese 10-year bonds over German bunds climbing to records as recently as Sept. 28. The Irish spread was at 422 basis points yesterday and Portugal’s at 398 points. Greece’s premium was at 679 points.
Weber, who said in an interview in August that good central bankers don’t necessarily need to be diplomats, said “there is no evidence that asset purchases have had any significant impact on average euro-area sovereign bond yields.”
Providing Greece with a 110 billion-euro ($153 billion) lifeline to repay its debt violated the region’s no-bailout rule, Weber said. The clause, which forbids countries to pay for the debt of others, “needs to be reinvigorated.”
At the same time, “it wouldn’t be bad” if buyers of newly issued euro-region government bonds were forced to contribute to a “crisis resolution regime,” he said. A clause that makes senior debt holders partly responsible “could be a useful instrument.”
Weber is regarded by economists as a frontrunner to succeed Trichet when his non-renewable eight-year term at the ECB expires in just over a year. Trichet regularly characterizes his job as acting like a spokesman for the ECB’s 22-member board.
“It’s a role Weber would certainly have to grow into,” said Klaus Baader, co-chief European economist at Societe Generale in London. “At the same time, don’t forget for now he’s the president of the Bundesbank and not the ECB. He’ll have to defend the Bundesbank’s position against the interests of some of the other central banks in the euro area, whose economies have different needs.”
Germany’s economy expanded 2.2 percent in the second quarter, the fastest since the country’s reunification in 1990, and business confidence in September jumped to a three-year high. By contrast, Irish manufacturing and services shrank last month and Spain’s jobless rate touched 20.5 percent in August. Portugal’s economy may shrink 1.4 percent next year, the International Monetary Fund forecasts.
Weber’s language contrasts with Trichet’s reluctance to plot out the ECB’s exit strategy. Speaking in New York yesterday, Trichet reiterated his line that the ECB will wait until the end of the year to decide its next step.
“It could be seen as an attempt by Weber to seize the agenda,” said Ken Wattret, chief euro-area economist at BNP Paribas in London. “It doesn’t sound very much like what Trichet said last week and that risks muddying the waters and unsettling markets.”
Still, Weber said in his speech that ECB policy is currently “appropriate,” signaling he sees no immediate need to raise interest rates. Trichet said the same last week and repeated the remark in New York yesterday.
The ECB is currently debating how long to leave its emergency stimulus measures in place and how they should be removed when the council decides to head for the exit. Since August 2007, the ECB has been offering banks as much money as they need at its benchmark interest rate. It has also cut that key rate to a record low of 1 percent.
Weber said it’s necessary “not to postpone the exit from non-standard measures for too long,” he said.
The ECB is concerned that some banks in the euro region have become overly reliant on its funds, making it harder to withdraw that liquidity without roiling financial markets.
Weber said one risk of shifting its regular refinancing operations back to a floating interest rate is that distressed banks will place “high bids” for cash, which could translate into higher market rates than before the crisis started.
Still, that issue could be addressed by offering banks “generous” sums in its main operations, he said. That could then be followed by a gradual ‘phasing-out process’’ in a “step-by-step reduction of the allotment amounts, broadly in line with the estimated decline in banks’ demand for surplus liquidity.”
“Short-term money market rates would, over time, remain close to the level of the key policy rate without undue volatility,” he said.
Weber, viewed by economists as one of the Europe’s toughest inflation fighters, also said that the ECB could raise interest rates “before the phasing-out of non-standard measures has been finished.”
Weber warned governments and investors that the ECB can’t be expected to help out individual financial institutions in distress.
“Our operational measures cannot provide the solution to the problems still plaguing that part of the banking sector that has limited access to the interbank market,” he said. “Shareholders and governments solely remain responsible for resolving remaining undercapitalization and funding issues at individual financial institutions and will have to undertake greater resolution efforts” as emergency measures are phased out.
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