2012.06.25 20:45:06 Cyprus Requests Aid from European Bailout Fund

--Problematic if ESM borrows from ECB

--Bond buys viewed more critically now

--Central bank bond buys haven't solved the crisis

--Says euro zone in a 'critical condition'

(Adds new information, in the first, third, sixth and seventh paragraphs.)

      By Christopher Lawton, Todd Buell and Christian Grimm    

HAMBURG--The head of Germany's central bank said Monday that the euro zone's permanent stability fund, the European Stability Mechanism, can't turn to the European Central Bank for funding to bail out troubled states, likening this to the direct financing of states.

"In my view it is problematic if the ESM were to have access to financing via the central bank. I see that as the monetary financing of public budgets," Jens Weidmann said, speaking in a public interview with Germany's Spiegel magazine. The ECB is prohibited from financing governments directly, but is able to buy government bonds on the secondary market. Its program to do this has been in existence since May 2010, but has been dormant now for the last 15 weeks.

He said that the bond-buying program is now viewed "much more critically" than at the beginning, and that the ECB's rate-setting council sees that "the bond buys haven't addressed the causes of [the crisis]."

Some European leaders recently have called for the ECB to take a more-active role in fighting the crisis, by re-starting its government bond-buying program or lowering interest rates. While the central bank may cut interest rates at its next meeting, scheduled for July 5, analysts said they believe it is less likely that the ECB will re-start the bond-buying program, which would lower borrowing costs for wobbly euro-zone states.

Earlier Monday, Mr. Weidmann's colleague on the ECB's Governing Council, Ewald Nowotny, told an Austrian newspaper that the ECB doesn't want to continue buying government bonds.

Mr. Weidmann also said that the Bundesbank hasn't implemented some of the changes to the ECB's collateral standards, but wasn't more specific.

Last week, the ECB disclosed it would widen the range of collateral it would accept in exchange for loans. The move was viewed largely as an effort to help Spain's ailing banking sector. The Bundesbank at the time, however, said it took a "critical stance on the new rules." The German central bank has repeatedly criticized the ECB for its continued widening of collateral rules as the crisis has deepened.

"The European Monetary Union is in a critical condition," said Mr. Weidmann. "Central banks have their limits," he added.

He was also skeptical about the idea of an EU banking union as a quick fix for the region's fiscal and financial problems.

"Such a project has far-reaching consequences," he said. "The idea that this could be implemented overnight is absurd," Mr. Weidmann said.

A common deposit insurance in Europe, an idea backed by ECB President Mario Draghi, raised difficulties such as the question of liability and monitoring, which hadn't been sufficiently discussed, Mr. Weidmann said.

However, the idea is strongly opposed in many circles in Germany, with banking associations critical that such a move is akin to a "transfer union," whereby German funds are transferred to the euro zone's allegedly more fiscally reckless south.

Write to Todd Buell at todd.buell@dowjones.com and Christopher Lawton at christopher.lawton@wsj.com.

(END) Dow Jones Newswires

June 25, 2012 14:46 ET (18:46 GMT)