Bundesbank chief: Bond buying is ‘like a drug’

The head of Germany’s Bundesbank stepped up his opposition to the European Central Bank’s latest moves to battle the eurozone’s debt crisis yesterday, saying that plans to buy bonds risked becoming a drug on which governments would get hooked.

In the latest sign of a deepening rift within the ECB that has worried financial markets, Jens Weidmann warned in an interview in weekly Der Spiegel that the buying programme verged on the taboo for the bank of outright financing of governments.

He also hinted he was not alone at the ECB in his concern over the programme — in contrast to indications by the bank’s president Mario Draghi that Weidmann had been isolated in expressing reservations.

The ECB is being forced to take a greater role in fighting the crisis while governments negotiate legal and political hurdles to coordinate a longer-term response, but the Bundesbank wants to limit the scope of central bank action.

Draghi is expected to detail the bond-buying plan after a Sep 6 meeting of the bank’s Governing Council.

“Such a policy is for me close to state financing via the printing press,” said Weidmann. “In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks.”

Financing governments has long been a line in the sand for the ECB.

Weidmann’s predecessor as Bundesbank chief, Axel Weber, quit last year in protest at the ECB’s existing, but now dormant, bond-buying scheme — the Securities Markets Programme (SMP).

“We should not under-estimate the risk that central bank financing can become addictive like a drug,” said Weidmann.

The Bundesbank retains substantial influence within Germany and on financial markets due to its inflation- fighting credentials but, as just one of 17 constituents at the ECB, it is unlikely it could scupper Draghi’s plan.

Policymakers are posturing over the programme ahead of their Sep 6 meeting, at which markets will be looking for the central bank to spell out more details of the plan.

Sources said the ECB is considering setting yield band targets under the new bond-buying programme to allow it to keep its strategy shielded and avoid speculators trying to cash in.

Weidmann said setting such yield bond targets was a “sensitive notion” but rejected suggestions he was isolated in having such reservations.

Der Spiegel also reported there was a dispute within the ECB over the form of the programme, with officials from countries like Spain and Italy pushing for unlimited ECB intervention in secondary bond markets.

ECB officials from northern eurozone countries only want the central bank to intervene in a “short, but energetic” way when bond yields “explode” upwards, the magazine said.

Reuters