Germans lead resistance to ECB bond buying

Reuters

By Andreas Framke and Paul Carrel

FRANKFURT (Reuters) - Germans Jens Weidmann and Juergen Stark led a four-man group who opposed the reactivation of the European Central Bank's bond-buying programme, central bank sources said on Friday.

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Traders said the ECB bought Irish and Portuguese government bonds after deciding on Thursday to revive the programme, a move analysts said was misguided.

"If that is the ECB response, it's like the fire brigade responding but driving to the wrong place," said Holger Schmieding, economist at Berenberg Bank. "It doesn't douse the fire and harms the credibility of the fire brigade."

Italy, whose 10-year government bond yields rose above their Spanish equivalent on Friday, is now in the eye of the euro zone storm and the size of its economy -- it is a member of the G7 club -- means the whole single currency project is tied to its fate.

Another ECB Governing Council member, Belgium's Luc Coene, said on Friday the ECB could buy Italian and Spanish government bonds as long as these countries took measures to ease their budgetary problems.

Asked if once this work was done the ECB could buy the bonds, Coene said: "We already did it in the case of Greece, Portugal and Ireland, so I don't see why there would be let's say a sort of veto against that possibility."

His comments suggested there would be no imminent move on the part of the central bank to buy the debt of Italy and Spain, and tallied with the view of ECB President Jean-Claude Trichet.

Trichet said on Thursday it was necessary for Italy to frontload structural measures, when asked whether Italy was taking adequate steps to strengthen its public finances.

A 48-billion-euro ($68 billion) austerity programme passed by Italy's parliament last month delays the brunt of spending cuts until after a 2013 general election.

NORTH V SOUTH

The four dissenting votes show there is a profound split on the ECB's 23-member Governing Council, with opponents from the euro zone's core keen not to let profligate governments in the periphery ease up on their debt-cutting efforts.

In addition to Stark and Weidmann, two central bankers from Benelux countries opposed the bond purchases, the sources said.

As president of Germany's powerful Bundesbank, Weidmann's opposition to the bond-buy programme is crucial. He broke off his holiday to attend Thursday's policy meeting and will not be happy about the decision to intervene in the debt markets.

Weidmann took over the Bundesbank's presidency in May after his predecessor, Axel Weber, resigned and gave up the chance to lead the ECB after publicly opposing its bond-buying programme.

The ECB started to buy peripheral government debt in May last year and has 74 billion euros worth of bonds in its books.

As with Weber, Weidmann's opposition to the programme stems from an aversion to taking risk onto the central bank's books and to monetising government debt.

Weidmann will not do a Weber and resign but as president of the biggest of the euro zone's 17 national central banks he has a powerful voice Trichet cannot ignore.

The 43-year-old has been quick to quash any doubts about his independence from Berlin, where he worked as German Chancellor Angela Merkel's economics adviser until succeeding Weber.

Weidmann, whose name means 'hunter' in German, is already behaving like a wolf in wolf's clothing, attacking last month's euro zone debt deal, which he said "weakens the foundation for a currency union" -- a comment that put him at odds with a package Trichet helped seal with Merkel.

PERFECT STORM

Weidmann's readiness to dissent feeds into a perfect storm brewing for Mario Draghi, who faces a debt crisis in his native Italy, slowing growth, stubborn inflation, and a split at the ECB where he is due to succeed Trichet as president in November.

Though an accomplished central banker, Draghi is untested as a leader. As ECB president he will have to stamp his own mark on the presidency while also dealing with Weidmann's tough stance.

"It delineates Draghi, it reduces his wobble room," said David Marsh, co-chairman of think tank OMFIF.

Weidmann has the political antennae Weber lacked but his readiness to criticize policy the ECB has agreed to reflects the challenges he faces himself.

He is little known in Germany and has the unenviable task of trying to build a bridge between the German people and the euro project, of which they are sceptical and whose profligate member states many are fed up of bailing out.

His starting position is not great. A Manager magazine poll conducted in July showed 30 percent of 336 people questioned did not trust him to keep the value of money stable in Germany.

This is partly because Weber's resignation saw him sprung into the Bundesbank presidency, without a smooth run-in.

To help promote the euro in Germany, Weidmann now needs to win Germans' confidence, which may explain his uncompromising stance and his criticism of last month's deal.

"He hasn't got any trust banked with the people, because the people don't know him," said Otto Fricke, budget expert with the Free Democrats (FDP), junior party in Merkel's ruling coalition.

(Editing by Mike Peacock)

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