Saturday

3rd Dec 2022

Eurozone D-Day: Central bank to announce bond-buying scheme

  • The ECB is meeting in Frankfurt to decide on Spanish bond-buying, while Angela Merkel is in Madrid (Photo: Valentina Pop)

Plans to buy government bonds from ailing eurozone countries in return for a stricter supervision of their reforms are likely to be endorsed by the European Central Bank's (ECB) governing council on Thursday (6 September), despite opposition from Germany's Bundesbank.

The intention to resume the dormant bond-buying programme had already been signalled last month, but the final vote was deferred until Thursday pending an internal review and attempts to bring the Bundesbank onboard.

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The German bank does not have a veto over the plan, which only requires a majority of the 17 central bank governors from the eurozone plus the six members of the executive board.

Speaking at a bankers' conference in Frankfurt on Wednesday, German finance minister Wolfgang Schaeuble said he would "never confirm there is a conflict" between Bundesbank chief Jens Weidmann and Mario Draghi, the head of the ECB.

But Weidmann has made his opposition to the bond-buying scheme public.

He warned the move was like an "addictive drug" for governments, who would no longer feel the need to carry out painful reforms.

Recession in most eurozone countries (except Germany), crippling-high borrowing costs for Spain and Italy, and capital flight from Spain - now equalling half of the country's economic output - are arguments in favour of Draghi's plan, however.

The ECB chief is backed by all other governors, as well as economists and international economic organisations such as the Paris-based OECD and the International Monteray Fund.

A concession to Germany will be the requirement for Spain or any other country wanting the ECB to buy its bonds - with a maturity of up to three years - to submit to increased EU budget and reform supervision.

They will have to formally request assistance for their bonds to be purchased by the eurozone bailout fund and sign a memorandum of understanding with the fund detailing the supervision of their reforms. The ECB would then co-ordinate its bond purchases with the bailout fund, which only has limited firepower.

The ECB wants to avoid a costly mistake made with Italy last year.

A gentleman's agreement with the then prime minister Silvio Berlusconi to carry out reforms in return for the bank buying up government bonds was abandoned.

But Spain has proved reluctant to apply for such a scheme, fearing markets will interpret it as a full-blown bailout. France is pushing Prime Minister Mariano Rajoy to ask for it, one official familiar with the matter told this website.

Germany, however, has given mixed signals on whether it would back the Spanish request.

German Chancellor Angela Merkel is in Madrid on Thursday and plans to hold a joint press conference with Rajoy around the same time as the ECB finishes its meeting.

Merkel has said she backs Weidmann, her former top economic adviser, but she has also shown public support for Draghi.

"A lot will depend on how Weidmann acts after the meeting. Everyone knows the Bundesbank is against, but Weidmann said he would not torpedo the programme," ING bank economist Carsten Brzeski told this website.

Unlike his predecessor, Axel Weber, who resigned over the ECB bond-buying scheme, Weidmann - as a former top economic adviser to Merkel - is "more pragmatic" and "politically very well educated," Brzeski said.

"Being against is only symbolic, the Bundesbank will have to implement the decision as well, once the ECB has voted," he explained.

ECB under pressure on bond-buying

Pressure is mounting on the ECB ahead of a key meeting on whether to buy Italian and Spanish bonds to help stabilise the euro.

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