Wednesday

28th Jun 2017

ECB under pressure on bond-buying

Pressure is mounting on the European Central Bank (ECB) ahead of a key meeting on Thursday (6 September), when it is expected to shed more light on a controversial bond-buying plan aimed at helping Spain and Italy.

"The ECB is the bazooka, the firepower, the muscle, the one that has the capacity to impress upon the markets," said Angel Gurria, a Mexican economist chairing the Paris-based Organisation for Economic Cooperation and Development - a club of the world's most developed economies.

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Asked by newswires whether the ECB should buy Italian and Spanish bonds in order to lower their borrowing costs, he said: "Yes, they should. If you ask when, the answer is the sooner the better."

Burria spoke on the sidelines of a conference in Slovenia's lakeside resort of Bled on Sunday.

"We have passed the question of moral hazard, these are performing countries [in terms of reforms], now it is the system that is at stake," he added.

Despite support from several leading economists, the bond-buying move still lacks backing from the ECB's most influential member - the German Bundesbank.

Last week, Bundesbank chief Jens Weidmann said in an interview that bond-buying can become "addictive like a drug" to governments and undermine reform activity.

German economy minister Philipp Roesler, the leader of the liberal Free Democratic Party in Germany, also told the Rheinische Post in an interview out on Monday that: "Bond purchases cannot remain a permanent solution as they drive the danger of inflation."

He added: "ECB president Mario Draghi has pointed out himself that only structural reforms in individual countries can secure the competitiveness and stability of our currency, not bond purchases."

For his part, Spanish Prime Minister Mariano Rajoy over the weekend told several newspapers, including Germany's mass-selling Bild, that he would only make a formal request for financial assistance once the ECB sheds more light on its bond-buying plan.

"We're going to await the decisions of the European Central Bank and on the basis of that we'll make a decision that, today, has still not been made. But if I believe it's good for all of Europe, for the euro and for Spain, I’ll make it and, if not, I won't," Rajoy said.

"If the [requirements] of the ECB are positive, I will present the aid request, if not, I won't."

The prime minister defended his track record on reform, saying "you will not find any government that, in the first eight months of its mandate, has changed so many things as mine."

On Friday, his government met the first deadline under the terms of a €100 billion bailout for its banking sector when it approved a package of laws required by the EU commission. The move including the creation of a 'bad bank' to deal with failed loans and mortgages.

Meanwhile, the country's fourth largest lender, Bankia, on Friday reported €4.5 billion losses, in line with what the government had estimated after taking over the lender in May.

Bankia is set to be the first bank to get money from the eurozone bailout, most likely in November, to the tune of €4-5 billion, the Wall Street Journal reports.

The ECB's Draghi is to meet with MEPs on Monday ahead of the bank's own gathering later this week. But the parliamentary hearing is to be held behind closed doors.

Agenda

ECB showdown on bond-buying plan THIS WEEK

A keenly-awaited meeting of the European Central Bank board on Thursday will have to reconcile the details of a bond-buying plan aimed at helping Spain and Italy with the fundamental opposition to the scheme within Germany's Bundesbank.

EU approves rescue of Italian banks

The European Commission gave the green light to a €17-billion plan by the Italian government to save Banca Popolare di Vicenza and Veneto Banca.

Focus

EU and China move to fill US void

At a summit in Brussels, EU and Chinese leaders will attempt to deepen ties on trade and climate as US president Trump plans to pull out of the Paris climate deal.

Italy reaches EU deal on failing bank

After months of negotiations, the European Commission and Italy agreed on the terms of rescue for Monte dei Paschi di Siena bank, including job cuts, salary caps and private sector involvement in the bailout.

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