Bundesbank president Jens Weidmann has said a European Central Bank (ECB) programme to stabilise the euro zone by buying sovereign bonds of crisis-hit countries is strictly limited in scope.
A year ago ECB president Mario Draghi insisted his bank would do "whatever it takes" to defend the euro and keep the currency bloc together. To back up his promise, he later presented a programme, dubbed Outright Monetary Transactions (OMT), to allow indirect ECB bond buy-ups to help lower borrowing costs.
Financial fire power
Markets interpreted Mr Draghi's remarks as a readiness to, if necessary, mobilise the ECB's unlimited financial fire power to defend the single currency. The mere announcement of the OMT instrument, which has yet to be activated, calmed market speculation over a potential euro zone break-up.
Now Mr Weidmann, a vocal critic of the policy from the outset, has insisted the ECB has not committed unlimited financial resources to tackling speculators.
"Mr Draghi did not speak of unlimited buy-ups without conditions. In the summer of 2012, he said the bank would do 'whatever it takes' and added that the ECB would act 'within its mandate'," said Mr Weidmann to the Süddeutsche Zeitung daily. "Markets in particular mostly forget this second part of his remark. In fact the new sovereign bond buy-up programme foresees palpable limitations."
At a recent hearings into the OMT programme at Germany’s constitutional court, ECB officials told the judges the programme was limited to €524 billion.
Mr Weidmann conceded these calculations were based on programme rules, and market conditions that were subject to change. But he said the signal of OMT limitations from the ECB was a “step in the right direction”.
“But they do not solve the problem of buying up sovereign bonds of poor creditworthiness,” he said.
His bank, backed by large sections of Germany’s media, political and financial worlds, fear OMT is a legal back door to allow the ECB make forbidden forays into fiscal policy and state financing.
Slippery slope
The German establishment view is that only by sticking to its narrow mandate of monetary stability and inflation fighting can the ECB increase pressure on politicians to provide solutions to the crisis. Anything else puts central banks on a slippery slope to political influence, as was clear from recent events, said Mr Weidmann.
"In Cyprus, an attempt is being made to shift the cost of restructuring to the central bank . . . through pressure for it to write-off emergency credits to banks and absorb losses . . . I consider this unacceptable."
