FRANKFURT (AFP) -- Tempers may well fray at the European Central Bank‘s policy meeting this week as president Mario Draghi seeks to head off German-led resistance to the bank’s anti-crisis armoury.
As financial markets look to the ECB to come to the eurozone‘s rescue yet again in the seemingly never-ending debt crisis, the meeting could see a face-off between Draghi and the head of Germany’s Bundesbank, Jens Weidmann.
The German central bank chief has made no bones about his opposition to a bond-buying program aimed at helping the most debt-wracked member states.
And newspaper reports have even suggested that Weidmann has repeatedly threatened to resign over the issue, as did his predecessor Axel Weber and the ECB‘s former German chief economist Juergen Stark.
Expectations are indeed running high for the ECB governing council’s regular monthly meeting on Thursday.
At last month‘s meeting, Draghi had said the central bank “may” resume bond purchases, albeit under strict conditions that are still in the process of being worked out.
But markets may be disappointed if they bet on Draghi revealing the details or resuming the bond buying this week, analysts warned.
“Despite the high expectations in the markets, the ECB is likely only to present an interim report on the bond purchase program at the council meeting to be held on Thursday,” said Commerzbank economist Michael Schubert.
Capital Economics economist Jennifer McKeown agreed.
“We expect the ECB to disappoint markets this week with its plans for peripheral government bond purchases. President Draghi is likely to state that such purchases will be limited and that they will not begin until after the EFSF or ESM have bought bonds themselves,” she said, referring to the eurozone’s two rescue funds.
The ECB initially launched its bond-buying blitz under the Securities Market Program (SMP) in 2010 to help debt-wracked eurozone countries that were finding it difficult to drum up financing in capital markets.
It has since accumulated 208.5 billion euros ($260 billion) in bonds from Greece, Ireland, Portugal, Italy and Spain as part of the program.
Nevertheless, the SMP has lain dormant for much of this year, despite expectations it could be restarted any time.
Weidmann -- who insists he is not the only person to suffer “stomach pains” about the program -- argues the bond purchases, which have worked in the past at bringing down the borrowing costs of crisis-hit countries, are tantamount to monetary financing, where the central bank prints money to pay off a country‘s debt. And that is expressly forbidden under the ECB’s statutes.
He also fears the measures will fuel inflation, ease the pressure on over-spending governments to get their finances in order and erode the independence of the ECB.
But Weidmann‘s opposition is not the only problem.
The ECB has said any new bond purchases will only be carried out in parallel with the EFSF and its successor the ESM or European Stability Mechanism, a permanent 500-billion-euro rescue fund that should have been up and running at the beginning of July, but has been held up by Germany’s Constitutional Court.
The court is scheduled to decide on September 12 whether the ESM can be signed into law, or whether its fate must wait until next year when the court will make a final ruling on the fund‘s compatibility with the German constitution.
“If the court’s judgement means that the ESM cannot take effect in the planned format, the ECB will also have to redefine the details of its program,” said Commerzbank‘s Schubert.
“For that reason, Thursday’s council meeting is likely to decide only on those details that are independent of the ESM,” the analyst said.
Of course, the ECB has other tools at its disposal to help fight the crisis fires, such as a further reduction in eurozone interest rates.
Since the crisis re-erupted late last year, the central bank under Draghi has brought borrowing costs down to an all-time low of 0.75 percent.
Additional easing may be on the cards if the eurozone economy -- which already contracted by 0.2 percent in the second quarter -- weakens further.
The ECB is set to publish its updated economic forecasts on Thursday and the Austrian central bank head Ewald Nowotny indicated a downgrade is likely.
Nevertheless, not all the recent data have been negative, so it is possible the ECB may sit tight and hold back from cutting rates until a future meeting,“ said Commerzbank‘s Schubert.
