Weidmann resignation report turns up heat on ECB’s Draghi

German central bank chief Jens Weidmann’s reported threat to resign has piled pressure on European Central Bank President Mario Draghi to assuage his opposition to a new bond-buying plan without tying it up in so many knots it is rendered ineffective.

A Bundesbank spokesman declined to comment on Friday on a report in the mass circulation Bild newspaper that Weidmann, who has stressed his opposition to the strategy, had considered quitting several times in recent weeks but had been dissuaded by the German government.

In Berlin, a government spokesman said Chancellor Angela Merkel supports Weidmann but declined to comment on the report, which lays bare a deep rift within the ECB over the bond scheme that is increasingly being played out in public.

Stepping up the pressure to attach conditions to the plan, fellow German ECB policymaker Joerg Asmussen said late on Thursday the ECB should only buy sovereign bonds if the International Monetary Fund is involved in setting the economic reform programmes that should be demanded in return.

“Opposition from Weidmann and reservations from some other Council members will mean that ECB bond purchases would be highly conditional, be focused on the short end and would not aim to bring yields down quite as much as Italy and Spain might like to see,” said Berenberg Bank economist Holger Schmieding.

Draghi is skipping this weekend’s Jackson Hole policymakers’ retreat to try to forge an agreement. The Italian will have little time to celebrate his 65th birthday on Monday as he tries to seal a deal before a September 6 ECB policy meeting.

He is preparing to ease painful borrowing costs in Spain and Italy, in the teeth of Bundesbank opposition, to buy euro zone governments time to negotiate legal and political hurdles to a longer-term response to the bloc’s debt crisis.

Draghi’s July 26 vow to do “whatever it takes” to save the euro heralded his signature plan. But securing majority support for a plan Weidmann can live with poses the biggest balancing act he has faced since taking the ECB helm on November 1 last year.

Highlighting the range of views among ECB policymakers, Executive Board member Benoit Coeure said on Friday the bank would do everything in its mandate to preserve the integrity of the euro — a line similar to Draghi’s in late July.

The ECB was studying ways of intervening in the short-term bond market based on strict conditionality and the countries concerned agreeing to aid programmes with the euro zone bailout funds, Coeure said.

The ECB was hurt by its experience last year of buying Italian bonds, only for Italy’s then-prime minister, Silvio Berlusconi, to renege on reform promises he had made to get the ECB to step in.

Austria’s ECB representative, Ewald Nowotny, addressed the ECB taboo of directly financing members states, saying there was a difference between buying bonds directly from governments and purchasing them on the secondary market to get yields down.

That tallies with Draghi’s position, who said on Wednesday the ECB must employ “exceptional measures” at times to fulfil its mandate, his argument being that official euro zone interest rates are at record lows yet borrowing costs in some of its members are sky high, so monetary policy is not working as it should.

“I would warn against making an over-simple or even an ideological discussion about it,” Nowotny said.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell