ECB risks becoming 'bad bank' with bond purchases: economist

18th May 2010, Comments 0 comments

The European Central Bank risks turning into a "bad bank" if it keeps buying government bonds from troubled eurozone countries, the chief economist of Germany's biggest bank said on Tuesday.

The ECB "risks becoming a bad bank if the operation is not ended soon," Thomas Mayer of Deutsche Bank told the daily Frankfurter Allgemeine Zeitung (FAZ).

The term "bad bank" refers to a financial structure created to unload risky debt so commercial banks can get their finances in order.

"Markets fear that the ECB will be used as a spill basin and its balance sheet will deteriorate," Mayer added, "because some countries that have issued bonds bought by the ECB could default on their debt despite the support they have received."

In addition to two European Union/International Monetary Fund rescue packages worth more than one trillion dollars, the ECB bought last week 16.5 billion euros worth of sovereign debt issued by countries that have found it difficult to borrow money on private capital markets.

The central bank has since said it will neutralise the operation by taking in an equivalent amount of fixed-term deposits, which means the overall amount of money supply should not be affected, curbing inflationary pressures.

But Mayer said the ECB, which has launched an media offensive in the German press to defend its action, had nonetheless lost credibility with its intervention, which has the side effect of financing government debt.

"We can limit the damage" by ensuring the measure is "exceptional, temporary and of a limited volume," the Deutsche Bank economist added.

Last week, Deutsche Bank boss Josef Ackermann, a Swiss national, raised hackles among German ministers when he publicly doubted Greece's capacity to repay tens of billions of euros (dollars) in emergency EU loans.

Mayer told the FAZ that "doubts are legitimate" about the potential effectiveness of austerity measures passed by several countries on the eurozone's periphery, and Greece in particular.

© 2010 AFP

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