Pressure is mounting on the European Central Bank to water down emergency measures to prop up Spain and Italy, after reports that the chief of Germany’s Bundesbank threatened to quit in protest at the plan.
Pressure is mounting on the European Central Bank to water down emergency measures to prop up Spain and Italy, after divisions within the eurozone were laid bare by reports that the chief of Germany’s Bundesbank threatened to quit in protest at the plan.
ECB president Mario Draghi was expected next week to unveil a new bond-buying programme to help the two struggling eurozone states go on without a formal bail-out. Analysts now expect the measures to fall short of Mr Draghi’s vow to do “whatever it takes” after the German government had to persuade the influential Jens Weidmann to stay in his post.
Details of the rift emerged as economists prepared to cut their growth forecasts for the single currency bloc once again, following dismal eurozone unemployment figures that saw joblessness rise above 18m for the first time. It also came as Madrid signed up to a vital financial reform package to secure a €100bn (£79bn) eurozone bail-out for its banks.
Mr Draghi appeared to have secured the authority to press ahead with his bond-buying programme after winning the support of the German chancellor, Angela Merkel. With just days to go, he has been confronted with a new problem.
Stepping up the pressure, fellow German ECB policymaker Jörg Asmussen said the ECB should only buy bonds if the International Monetary Fund was involved in setting an economic reform programme in return. Analysts expect Mr Weidmann to be outvoted on the ECB next week, but his threat to quit would put Ms Merkel, the region’s power-broker, in an awkward political position as the Bundesbank is revered in Germany.
“By being so outspoken beforehand, he hopes to limit the extent of the operation,” a senior ECB source told Reuters. “That would constantly put a question mark over how far we could go.”
Berenberg Bank economist Holger Schmieding said: “Opposition from Weidmann and reservations from some other council members will mean that ECB bond purchases could be highly conditional . . . and not bring yields down quite as much as Italy and Spain might like to see.”
Adding to the sense of uncertainty, ECB officials on Friday night said governors would be presented with a list of options for bond purchases the day before they sit down to deliberate the plan. Economists said the process increased the chances of a decision being pushed back.
The crisis has grown so severe that Mr Draghi this week pulled out of the annual central bankers’ gathering at Jackson Hole in the US to address the problem. Ms Merkel is also reported to have asked the Italian prime minister, Mario Monti, not to request aid until the Bundesbank issue is resolved. Mr Weidmann and the German authorities refused to comment on the reports of his threat on Friday.
Austria’s ECB representative, Ewald Nowotny, lent his support to Mr Draghi by stressing the difference between buying bonds directly from governments and purchasing them on the secondary market to get yields down. “I would warn against making an over-simple or even an ideological discussion about it,” he said.
David Lipton, the IMF’s deputy managing director, also backed Mr Draghi. “He’s got the right idea, the right approach and he needs the conditions under which his action can be effective. He needs the countries of the periphery to be doing what they need to do and then he can act,” he told CNBC.
The dispute took centre stage as Spain’s cabinet approved a major financial reform package to qualify for a €100bn rescue package, including the creation of a “bad bank” to buy troubled property assets .
Deputy prime minister, Soraya Sáenz de Santamaria, said the financial sector reform, Spain’s fifth in three years, was necessary “to have banks lending again”. The “bad bank” will last for between 10 to 15 years and will buy bad loans and foreclosed property from lenders that receive eurozone aid .----
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