German central bank chief Jens Weidmann's reported threat to resign has piled pressure on European Central Bank president Mario Draghi to assuage his opposition to a new bond-buying plan without tying it up in so many knots it is rendered ineffective.
A Bundesbank spokesman declined to comment today on a report in the mass circulation Bild newspaper that Mr Weidmann, who has stressed his opposition to the strategy, had considered quitting several times in recent weeks but had been dissuaded by the German government.
In Berlin, a government spokesman said Chancellor Angela Merkel supports Mr Weidmann but declined to comment on the report, which lays bare a deep rift within the ECB over the bond scheme that is increasingly being played out in public.
Stepping up the pressure to attach conditions to the plan, fellow German ECB policymaker Joerg Asmussen said late yesterday the ECB should only buy sovereign bonds if the International Monetary Fund is involved in setting the economic reform programmes that should be demanded in return.
"Opposition from Weidmann and reservations from some other Council members will mean that ECB bond purchases would be highly conditional, be focused on the short end and would not aim to bring yields down quite as much as Italy and Spain might like to see," said Berenberg Bank economist Holger Schmieding.
Mr Draghi is skipping this weekend's Jackson Hole policymakers' retreat to try to forge an agreement. The Italian will have little time to celebrate his 65th birthday on Monday as he tries to seal a deal before a September 6th ECB policy meeting.
He is preparing to ease painful borrowing costs in Spain and Italy, in the teeth of Bundesbank opposition, to buy euro zone governments time to negotiate legal and political hurdles to a longer-term response to the region's debt crisis.
Mr Draghi's July 26th vow to do "whatever it takes" to save the euro heralded his signature plan. But securing majority support for a plan Mr Weidmann can live with poses the biggest balancing act he has faced since taking the ECB helm on November 1st last year.
Highlighting the range of views among ECB policymakers, executive board member Benoit Coeure said today the bank would do everything in its mandate to preserve the integrity of the euro - a line similar to Mr Draghi's in late July.
The ECB was studying ways of intervening in the short-term bond market based on strict conditionality and the countries concerned agreeing to aid programmes with the euro zone bailout funds, Mr Coeure said.
The ECB was hurt by its experience last year of buying Italian bonds, only for Italy's then-prime minister, Silvio Berlusconi, to renege on reform promises he had made to get the ECB to step in.
Austria's ECB representative, Ewald Nowotny, addressed the ECB taboo of directly financing members states, saying there was a difference between buying bonds directly from governments and purchasing them on the secondary market to get yields down.
That tallies with Mr Draghi's position, who said on Wednesday the ECB must employ "exceptional measures" at times to fulfil its mandate, his argument being that official euro zone interest rates are at record lows yet borrowing costs in some of its members are sky high, so monetary policy is not working as it should.
"I would warn against making an over-simple or even an ideological discussion about it," Mr Nowotny said.
But Mr Weidmann is not a lone voice on the ECB governing council and his opposition to the new round of bond buying, which he says could be "addictive like a drug", means Mr Draghi must attach strings to the plan to keep pressure on governments to reform and tighten their budgets.
Mr Draghi faces a trade-off as he sweats on a solution ahead of the September 6th meeting. Go too far in trying to calm the Bundesbank and he risks ending up with a dud of a plan that has no impact on markets. Not go far enough and he risks more Bundesbank ire.
Mr Weidmann cannot stop Draghi's programme and the Italian has managed to isolate him to some degree by winning German chancellor Angela Merkel's tacit support for his scheme.
But Mr Weidmann could still undermine the programme's impact.
"My fear is that his own decision will stand on principle, but that by being so outspoken beforehand, he hopes to limit the extent of the operation," a senior ECB source said. "That would constantly put a question mark over how far we could go."
In a weekend interview with Germany's Der Spiegel magazine, the German central bank chief said: "I hardly believe that I am the only one to get stomach ache over this."
Simon Tilford at the Centre for European Reform said that to have a significant impact on Italian and Spanish borrowing costs, the ECB plan must dispel investor concerns that the two countries' membership of the euro zone ever be threatened.
"Unfortunately, the ECB is highly unlikely to do enough to convince investors that membership is unequivocally forever, not least because the Bundesbank opposes any open-ended commitment to cap borrowing costs," Mr Tilford said.
The ECB source, speaking on condition of anonymity, did not think the ECB would announce a target for bond yields, or aim for a specific spread - the premium other sovereigns' paper trades over the German benchmark.
Reuters
