The European Central Bank risks irreparable damage to its reputation by agreeing to the mass purchases of southern European bonds in defiance of the German Bundesbank and apparently under orders from EU leaders.
By Ambrose Evans-Pritchard
Published: 5:30AM BST 11 May 2010
Photo: Bloomberg
Jean-Claude Trichet, the ECB's president, denied there had been any political interference. "We are fiercely and totally independent," he said.
It is clear, however, that the two German members of the ECB's council voted against the move, a revelation that may cause a catastrophic political backlash in Germany.
Axel Weber, ultra-hawkish head of the Bundesbank, told Boersen-Zeitung that the emergency move over the weekend had been a mistake. "The purchase of government bonds poses significant stability risks and that's why I'm critical of this part of the ECB's council's decision, even in this extraordinary situation," he said. The rebuke is devastating. The ECB draws it authority from the legacy and aura of the Bundesbank.
The European Commission made matters worse by announcing the decision in the small hours of Monday morning before the ECB had spoken, fuelling suspicions that monetary policy is being dictated by the political authorities. French President Nicolas Sarkozy further enraged Berlin by claiming that 95pc of the $1 trillion "shock and awe" rescue package was based on French proposals.
"Germans are watching this in horror," said Hans Redecker, currency chief at BNP Paribas. "If this ends up in full-blown quantitative easing, people are going to be up in arms."
As recently as last Thursday Mr Trichet said the governing council had not even discussed buying bonds. Julian Callow, of Barclays Capital, described the volte-face as incredible. "The ECB has ripped up its exit strategy. They have always prided themselves on transparency and consistency, and now they have done this abrupt U-turn."
The ECB said it was intervening in "those market segments that are dysfunctional", almost certainly buying Greek, Portuguese, Irish and Spanish bonds. It will sterilise purchases through other means so that the action will not add net stimulus or undermine monetary policy, at least for now.
Spreads on 10-year Greek debt fell 467 basis points to 7.75pc in euphoric trading. Crucially, spreads fell 163 points to 4.62pc in Portugal and 51 points to 3.92pc in Spain.
Marco Annunziata, chief economist at UniCredit, said the ECB alone is powering the market, raising concerns that any rally will be short-lived. "The spread tightening has so far been driven mostly by ECB purchases and some short-covering, with much less buying interest from real money accounts," he said.
Mr Redeker said China and other emerging powers have lost confidence in EU management and stopped buying Club Med bonds, leaving the euro vulnerable to further sell-offs. The bank is predicting parity against the dollar by early 2011, but the immediate panic is over. "The ECB has done what it had to do: if spreads had continued to widen after what happened on Friday we would have faced a death spiral," he said.
Marek Belka, head of the IMF's European operations, said the show of financial power buys time but cannot solve EMU's deeper structural crisis. "It has a potential of calming the markets for a moment. I obviously don't treat it as a long-term solution. This is morphine that stabilises the patient, and the real medication and the real treatment has yet to come," he said.
Fresh EU data shows that total debt is 224pc of GDP in Greece, 272pc in Spain, 309pc in Ireland, and 331pc in Portugal, each with a heavy reliance on external finance that can dry up at any moment. They are all being forced to impose austerity measures, risking a slide into deeper slump and a potential debt-deflation trap.
Details of the rescue plan are becoming clearer. The EU has invoked the "exceptional circumstances" clause of Article 122 of the Lisbon Treaty to beef up the EU's balance of payments fund from €50bn to €110bn. The money can be used to bail-out countries within the eurozone for the first time. This is a "Euro Bond" by any other name, evoking the German nightmare of an EU debt union.
The eurozone will create a Special Purpose Vehicle able to marshal a further €440bn. This is to be a outside the EU institutions on German insistence in order to circumvent the EU's "no bail-out" law. The hope is to head off trouble at Germany's constitutional court, though it is certain to be challenged anyway.
The IMF will match this with another €220bn or so, taking the whole package to roughly €750bn. Ulrich Leuchtmann, currency chief at Commerzbank, said it is far from clear whether EU states can cover their pledge, since most have their own debt problems. "Not even the eurozone as a whole has sufficient funds to provide for member states in trouble. The volume of aid is likely to be much smaller than the official figures suggest," he said.
The ECB resisted the purchase of state bonds after the Lehman crisis, arguing such action would amount to a subsidy for the most indebted states. But it also made no secret of its disdain for quantitative easing by the Bank of England and the US Federal Reserve, viewing this as the start of a slipperly slope towards "monetisation" of deficits.
ECB board member Lorenzo Bini Smaghi went so far as to deride QE an inflation policy, saying: "It is not what people in Europe want." The sudden change in policy will come as a shock to those who see the ECB as last bastion of orthodoxy in a world of heretics.
0 comments:
Publicar un comentario