Bundesbank not budging in opposition to ECB bond buying

BERLIN (Reuters) - Germany's Bundesbank on Monday showed no signs of lowering its resistance to a European Central Bank plan to buy billions of euros worth of Spanish and Italian government bonds to reduce those countries' crippling borrowing costs.

The powerful Bundesbank, the central bank of Europe's largest economy, is keeping up its opposition even after Germany's political leaders voiced some support for the ECB's crisis-fighting strategy.

The bank objects to ECB President Mario Draghi's plan to resume buying bonds on the grounds that this amounts to monetary financing of governments, contravening European law.

"The Bundesbank remains critical of the purchase of euro system sovereign bonds, which comes with considerable risks for stability," the Bundesbank wrote in its monthly report.

"Decisions about a possible broader mutualisation of solvency risks should be... with the governments and parliaments, and should not occur via central bank balances."

Draghi indicated earlier this month the ECB could intervene in debt markets but he held back from announcing concrete steps.

The Bundesbank retains substantial influence within Germany and across financial markets due to its inflation fighting credentials, but it is unlikely it could scupper Draghi's plan, given the German central bank is only one of 17 constituents at the ECB.

The ECB on Monday sought to quash press speculation about the shape its planned bond-buying program would take, saying decisions had not yet been taken.

Over the weekend, German magazine Der Spiegel said the ECB is considering buying struggling euro zone country's bonds if their borrowing costs exceeded a certain premium over Germany's.

A Reuters poll of economists conducted last week showed most did not expect the ECB to set a cap on Italian and Spanish bond yields.

The ECB is still planning the details of the new bond-buying program, which will be distinct from the dormant Securities Markets Programme - the first wave of buying it began in May 2010 and over which the last Bundesbank chief, Axel Weber, quit in protest.

As a pre-requisite for any ECB bond buying to help a troubled euro zone state, the central bank wants the government concerned to request aid from the bloc's bailout funds and to fulfill the economic conditions attached to any help.

However, one central bank source said there is still disagreement within the ECB over the terms of the scheme.

BUDGET CONSOLIDATION

The Bundesbank on Monday also warned that Germany's economy, which has remained resilient through most of the euro zone's debt crisis and posted solid growth, could suffer more in the second half of this year.

Companies were already "considerably more gloomy" about their business prospects, and had been investing less for three quarters of a year as exports to the currency bloc sagged, the Bundesbank said.

While the economy put in a strong performance in the first three months of this year, growth slowed to 0.3 percent in the second quarter and recent data have shown manufacturing orders, industrial output, imports and exports all dropping.

The Bundesbank warned the government should not delay budget consolidation or be overly optimistic about its room to maneuver on spending.

"The trust in German state finances is an important stabilizing factor in the current crisis but is not unshakeable," the Bundesbank wrote.

Finance Ministry data showed on Monday that Germany's tax revenues climbed in July, as Europe's largest economy benefited from higher employment and wage rises.

But the Bundesbank said rising tax revenues, lower interest rates on German debt and lower expenses on unemployment could not offset costs incurred from aid for euro zone rescues and the liquidation of state-backed lender WestLB.

(Reporting By Sarah Marsh, Additional reporting by Sakari Suoninen, Michelle Martin and Madeline Chambers,; Editing by Noah Barkin and Toby Chopra)

Source: http://news.yahoo.com/bundesbank-not-budging-opposition-ecb-bond-buying-123620940--finance.html

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