ECB Divided over Efforts to Save Euro
31/07/2012 1 comentario
(…..) Draghi’s maneuvering is starting to annoy many central bankers. “You never know where he stands”, often complain representatives of creditor and borrower countries alike. Even more critical is the fact that, with his most recent plan to rescue euro, he is jeopardizing the fragile equilibrium between north and south in the ECB Governing Council. According to plans were circulating among Europe’s monetary watchdogs last Friday, ECB might buy bonds of the threatened Spanish government again as a supplement to the purchases by the EFSF. Plan envisions having Luxembourg-based temporary bailout fund buy bonds directly from governments because ECB is not allowed to make such purchases on so-called primary market. However, under Draghi’s plan, the monetary watchdogs will buy securities of banks or investment funds in the so-called secondary market so as to drive down yields. This would double the firepower of the euro zone’s crisis weapons while simultaneously preventing Spain itself from having to resort to bailout fund and accept stricter constraints on its reform programs. But it is already clear the plan will encounter resistance. Many monetary watchdogs, including Weidmann and, most of all, central bankers from Netherlands, Belgium and Finland, have already been very outspoken in recent months about their opposition to new bond purchases. Many members of ECB Governing Council view the purchase program that quietly expired at the end of last year as expensive, risky and generally counterproductive. Fewer and fewer central bankers are willing to do the work of the politicians and add more risks to the ECB’s balance sheet. Moreover, the purchases made to date have not proven very successful. When the ECB bought a large number of Spanish government bonds last August, yields declined by more than a percentage point at first. But, soon thereafter, when ECB cut back on its purchasing program, yields promptly shot back up. In fact, by mid-November, Spanish government already had to offer investors higher bond yields than before the ECB’s emergency measure had begun. In the case of Greece, the effect has completely evaporated. When situation escalated there in early May 2010, the monetary watchdogs intervened and, within a few weeks, bought Greek sovereign debt worth dozens of billions of euros. Yields were cut in half after that, declining from more than 14 to about 7% for five-year bonds. But then they shot back up above 10% within the next month and a half. And when the ECB terminated its purchasing program, the yields on Greek government debt reached new record highs. Today, situation in Greece is more hopeless than ever. Unintended Consequences. There is another reason why ECB cannot bring lasting calm to the market by buying sovereign debt: Central bank is merely fighting symptoms of the crisis rather than its causes. But the financial markets regain confidence in a country’s government bonds if its government decisively implements reforms and things start changing for better. Not surprisingly, Draghi’s recent plan is being viewed critically in Germany, by monetary watchdogs and politicians alike. Carsten Schneider, parliamentary budget expert for the center-left Social Democratic Party (SPD), calls the plan “unconditioned and unauthorized intervention.” Critics are also speaking out within governing coalition, made up of Merkel’s Christian Democratic Union (CDU), its Bavarian sister party, Christian Social Union (CSU), business-friendly Free Democratic Party (FDP). Norbert Barthle, CDU’s chief budgetary expert, says that it is “not the central bank’s job to buy up government debt.” And his colleague with CSU, Hans Michelbach, is “speechless Draghi is catering to comprehensive-coverage mentality of the southern countries.” For this reason, says Michelbach, the euphoria in the markets could “quickly turn into depression once again.” That’s the tragic aspect of Mario Draghi’s rescue idea: What is intended to keep the monetary union together could actually drive it even further apart.