ECB sends mixed messages on bond purchases

31st May 2010, Comments 0 comments

The ECB sent mixed messages on its switch of policy to buy government debt bonds on Monday, with the head of the bank defending the purchases and the German central bank chief criticising them.

European Central Bank president Jean-Claude Trichet defended the ECB's bond buying scheme, telling a conference organised by the Austrian central bank in Vienna that it did not undermine the ECB's policy or independence.

"We are not printing money," he declared.

"This confirms and underpins our commitment to price stability." he said.

The ECB has come under fire for its unprecedented scheme of intervening in securities markets to buy government and private debt in a moved aimed at halting speculative attacks in the eurozone and restoring stability to bond markets.

However, in Mainz, western Germany, German central bank governor Axel Weber, a key member of the ECB governing council, reiterated his criticism of the ECB programme to buy sovereign bonds.

"Monetary policy has taken new paths to fight the crisis that I continue to view critically owing to the risks" involved in buying a country's debt, said Weber, an unofficial candidate to become the next ECB chief in late 2011.

The ECB's governing council decision concerns bonds issued by troubled eurozone countries like Greece, Portugal and Spain.

Weber voted against the measure and has spent considerable time since explaining his position.

The German central bank governor said he was concerned above all about the ECB's independence from political pressure.

One should "draw a clear line of separation between responsibility for monetary policy and fiscal policy," Weber said.

Some analysts have argued that the ECB risks turning into a "bad bank" if it keeps buying government bonds from troubled eurozone countries.

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

But Trichet disagreed.

"The latest measures address a malfunctioning of certain market segments," he said in Vienna.

"Without such measures, the market problems could have created risks to the favourable outlook for price stability. However, we have not gone beyond the goal of re-establishing a more correct transmission of our monetary policy."

Weber argued meanwhile that the ECB's duty was to maintain price stability and that only an independent central bank can do so.

"We should now limit the risks," Weber said.

"The operation must be carried out in a very targeted and limited way," he said.

It should "serve as a bridge until new state financing facilities" agreed by the European Union can take over, Weber said in reference to a massive rescue package drawn up by the EU and International Monetary Fund.

© 2010 AFP

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