Bundesbank opposes ECB bond buying

The European Central Bank bought eurozone government bonds at a brisk pace last week, despite opposition from Germany’s Bundesbank, which on Monday broadened its criticism of steps taken to shore up Europe’s monetary union.

The €14.3bn spent was less aggressive than the €22bn of purchases in the previous seven days but still the third-largest weekly amount since the programme was launched in May last year.

It highlighted the scale of the task that the ECB faces in calming investor worries about eurozone stability.

The ECB gave no details but has focused in recent weeks on stopping Spanish and Italian borrowing costs from spiralling out of control. The latest figure referred to purchases up until the middle of last week.

Italian and Spanish bond yields have stabilised at about 5 per cent after both threatened to hit 6.5 per cent, a level many consider unsustainable, shortly before the ECB started buying.

The programme is controversial within the ECB and its reactivation this month was opposed by at least three members of its governing council, including Jens Weidmann, Bundesbank president.

Further highlighting the divisions, the Bundesbank on Monday warned that steps to strengthen Europe’s bail-out mechanism could end up weakening the eurozone – and made clear its criticism of the ECB’s bond purchases.

In its monthly bulletin, the Bundesbank wrote that the surge in borrowing costs for Italy and Spain would “in no way” have amounted in the short term to an unsustainable burden on the countries’ finances that required immediate rescue measures.

Even at the higher rates demanded by financial markets, interest payments in Spain as a share of gross domestic product would have remained below the eurozone average in 2012.

For Italy, they would still have been below the level when the euro was launched in the late-1990s.

The Bundesbank warned that steps announced by eurozone leaders in late July to cut the costs of bail-out loans for countries such as Greece and Ireland, and to strengthen the powers of the European financial stability facility, would weaken incentives for sound public finances and undermine the principles behind the eurozone.

The Bundesbank’s criticisms have added to the pressure on Angela Merkel, German chancellor, as she seeks support in Berlin for the rescue measures – and has heightened investor doubts about how long the ECB will continue its bond purchases.

The ECB is anxious, however, that the EFSF should soon take over its role in intervening in bond markets.

Last week Jürgen Stark, an ECB executive board member, told an Austrian newspaper: “We are buying time but we cannot intervene on a long-term basis using the argument that the monetary policy transmission mechanism has been disrupted.”

The latest bond purchases brought the total bought since May 2010 to €110.5bn.

The ECB will attempt on Tuesday to withdraw an equivalent amount of liquidity from the financial system, thus “sterilising” any inflation impact of its purchases.

Additional reporting by Richard Milne in London