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Monday, Aug 27, 2012 1:00 PM UTC

Top German central banker opposes ECB bond buying

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Topics: From the Wires,

FRANKFURT, Germany (AP) — Germany’s top central banker has repeated his opposition to the European Central Bank intervening in bond markets to lower borrowing costs for indebted governments such as Spain and Italy, saying governments might get too used to the outside help.

Bundesbank head Jens Weidmann said in Monday’s edition of Der Spiegel magazine that governments could become dependent on such help rather than fixing their finances. He said “we should not underestimate the danger that central bank financing can be as addictive as a drug.”

Weidmann, who sits on the the ECB governing council, also said that the risk of losses on those bonds would ultimately be borne by eurozone taxpayers. Elected parliaments, not central banks, should make such decisions, he said.

He argued that buying bonds would also be too close to using the central bank’s monetary powers to support government finances, which the EU treaty forbids the bank to do.

European Central Bank head Mario Draghi has said the bank may buy government bonds if troubled governments first ask for help from the eurozone bailout fund. Bond purchases drive up the prices of bonds, and bring down their interest yields, since price and yield move in opposite directions.

The ECB would make purchases only after the country involved agreed to a list of conditions aimed at reducing its deficits and debts. It would buy the bonds together with the eurozone bailout fund.

Spain and Italy have faced elevated costs to borrow because investors fear they may not pay back all their debts. Yet they must frequently borrow on bond markets to pay off old bonds that are coming due, or face default. High borrowing costs are what forced Greece, Portugal and Ireland to seek bailout loans from other eurozone countries.

Weidmann has only one seat on the ECB’s 23-member governing council, and was identified by Draghi as the lone dissenter in the plan to buy bonds. He has added influence, however, because the Bundesbank’s strict position is supported by many legislators, economists and voters in Germany, the eurozone’s largest economy. Chancellor Angela Merkel, however, appears open to the bond purchase plan, along with the other German member of the ECB’s council, Joerg Asmussen.

Draghi has in the past shown a willingness to overrule the Bundesbank’s objections, but loud protests from such an influential member could complicate any bond market interventions, as markets might think the ECB was not solidly behind its effort.

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