FRANKFURT--The European Central Bank, backed by Germany, shot down
speculation that the ECB is preparing to dramatically escalate its
crisis response by setting a cap on government-bond yields in Spain,
Italy and other debt-saddled euro-zone countries.
Germany's central bank, the Bundesbank, also stepped up its opposition
to any bond purchases whatsoever by the ECB, exposing a deep divide
between the ECB and its largest member over the best way to address
high bond yields in crisis-hit countries.
The comments reflect the high stakes as the ECB's response to Europe's
nearly three-year-old debt crisis approaches a decisive phase. The
central bank's president, Mario Draghi, opened the door earlier this
month to large-scale purchases of short-dated government bonds and
said officials would weigh specific proposals in coming weeks.
Measures that could be most effective from a market perspective, such
as yield targets, face legal hurdles and stiff opposition in Germany.
But limited steps may do little to resolve the crisis.
"It is absolutely misleading to report on decisions which have not yet
been taken and also on individual views, which have not yet been
discussed by the ECB's Governing Council," an ECB representative said.
The ECB was responding to a weekend report in German magazine Der
Spiegel that said officials were considering a plan to cap the
borrowing costs of struggling euro-zone governments by buying
unlimited amounts of their bonds to keep interest rates at a
reasonable level.
The central bank rarely responds publicly to specific media reports,
as it did Monday, suggesting it was taking pains to quell further
speculation on the issue.
The euro rose early Monday on the report before retreating after the
ECB's statement, which was echoed by Germany's Finance Ministry, whose
spokesman on Monday called the idea "very problematic." Spanish and
Italian bond yields ended lower.
Spain has been vocal in its insistence that the ECB buy massive
amounts of its bonds to reduce borrowing costs. Spain's finance
minister, Luis de Guindos, reaffirmed over the weekend that Madrid
wants the ECB to commit to open-ended debt purchases before Spain asks
for financial assistance.
The ECB appeared to reject Spain's plea.
"As far as recent statements by government officials are concerned, it
is also wrong to speculate on the shape of future ECB interventions,"
the ECB representative said, without specifically mentioning Spain.
"Monetary policy is independent and undertaken strictly within the ECB
mandate."
Such a dramatic step is what is needed to restore investor confidence
in government-bond markets in southern Europe, some analysts say.
These markets have been pummeled in recent months by concerns that a
mix of economic recession and high debt levels will make it difficult
for Spain and Italy to obtain financing without outside assistance. By
setting a cap, the ECB would commit to buying bonds whenever yields
approached a certain threshold, opening the door to unlimited
purchases.
Such policies have proved effective in Switzerland--where the central
bank has successfully set a ceiling on the value of the Swiss
franc--but they could be problematic in the euro zone.
An unlimited bond-buying commitment may run afoul of ECB rules
prohibiting it from financing government debt. It also raises a host
of practical problems such as how to define an appropriate bond yield
in each of the 17 euro-zone countries. If the ECB sets an explicit
target and fails to defend it, the central bank's credibility could be
severely damaged.
Putting the ECB's bond buys on autopilot may also weaken the resolve
of governments to slash their budget deficits and revamp their
economies.
Mr. Draghi signaled earlier this month that the ECB would consider
intervening only if countries ask the euro-zone bailout fund for aid
and agree to conditions for assistance.
The ECB began buying government bonds of Greece, Ireland and Portugal
in May 2010 and expanded the program to include Spain and Italy last
August. But officials have repeatedly called the program temporary and
limited, weakening its effectiveness. The ECB said on Monday that it
had stayed out of government-bond markets for a 23rd straight week
last week.
One potential compromise would be for the ECB to guide bond investors
toward informal yield targets through its purchases without committing
itself to explicit caps. That would bring yields down without tying
the central bank's hands.
Yet even that approach would likely run into opposition from the
Bundesbank, which said in its monthly bulletin on Monday that it
"remains of the opinion that .. government-bond purchases by the [ECB
and its member banks] should be viewed critically" and entail
"substantial" risks.
The Bundesbank considers bond purchases by the central bank a
dangerous breach into the realm of fiscal policy.
Although the ECB has overruled the Bundesbank before on bond buying,
and would likely do so again if needed, German opposition is seen by
many analysts as limiting the effectiveness of the program.
Write to Brian Blackstone at brian.blackstone@dowjones.com and Tom
Fairless at tom.fairless@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
August 20, 2012 07:25 ET (11:25 GMT)
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