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German Central Bank Goes to War with ECB Over Resumption of Bond Purchases

Interest-Rates / Global Debt Crisis Aug 05, 2011 - 02:20 AM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleECB Resumes Bond Buys; Open Feud Between German Central Bank and the ECB; Implications of "Trichet Out, Draghi In"

Yet Another Open Feud Between German Central Bank and the ECB on Bond Purchases;

A feud between former Bundesbank president Axel Weber and ECB president Jean-Claude Trichet over the purchases of government bonds led to the resignation of Axel Weber who was opposed to the purchases.

Another Open Feud Between Germany and the ECB

A regime change did not change Germany's opposition to bond purchases. Jens Weidmann, the new Bundesbank president also opposes ECB's purchasing of government bonds. Another major feud between Germany and the ECB is in the works.

Please consider Bundesbank Opposed To ECB Resumption Of Bond Buy

Germany's Bundesbank opposed a resumption of the European Central Bank's bond buying program at this week's governing council's meeting, a euro-zone central bank source told Dow Jones Newswires Thursday.

The Bundesbank wasn't the only central bank to oppose a resumption of the program, the source added.

ECB President Jean-Claude Trichet indicated at Thursday's press conference that the ECB is ready to restart its Securities Market Program, which has been on hold since March, following a spike in Italian and Spanish bond yields.

Trichet Overrides Weidmann

Trichet foolishly ignored the advice of Weber and is making the same mistake again. For details of the feud, please see the Financial Times report ECB warns Spain and Italy

Jean-Claude Trichet on Thursday overrode opposition from Germany’s powerful Bundesbank to send a different signal: that the euro’s monetary guardian would help governments if they took steps needed to tackle the eurozone’s escalating debt crisis.

The ECB’s surprise decision to restart intervening in bond markets – but limit its action to buying Portuguese and Irish bonds – made clear to Rome and Madrid that it still thought they had to do more to bring public finances under control.

Separately, the ECB further downgraded expectations of further interest rate rises later this year, warning that risks to economic growth “may have intensified”. The ECB has already raise its main policy rate twice this year, most recently to 1.5 per cent in July.

But investors’ immediate reaction to the ECB plan was overwhelmingly negative. Economists warned the limited revival of the ECB’s bond purchase programme fell short of the broad response needed to calm investor nerves. “It is the right move, they had to do it – but if it is on-off, as in the past – it will not pacify markets,” warned Paul De Grauwe, economics professor at Leuven university.

In an apparent criticism of the ECB, Giulio Tremonti, Italy’s finance minister, said that when he talked to Asian investors, they said: "If your central bank doesn't buy your bonds, why should we buy them?"

In fact, there were clear limits to how far Mr Trichet’s could – or wanted – to go. Eurozone financial stability was “the responsibility of governments,” he said. The Bundesbank opposed the launch last year of the ECB’s bond purchase programme a year ago because it feared mixing fiscal and monetary policies would create long term inflation threats.

Jens Weidmann, president, who interrupted his holiday to attend Thursday’s meeting in Frankfurt, is thought to have been joined by at least two others in voting against its reactivation on Thursday. But the council was anyway wary: intervening in Spanish and Italian bond markets at this stage would have been premature, the 23-strong governing council decided.

Jens Weidmann is unhappy that the ECB will buy any government bonds, but Giulio Tremonti, Italy’s finance minister is upset the ECB will not buy Italian bonds. Said Tremonti "If your central bank doesn't buy your bonds, why should we buy them?"

Since when is it the duty of the ECB to buy sovereign government bonds? In reality, doing so is in clear violation of the Maastricht Treaty. Trichet broke the treaty on a technicality.

Jean-Claude Trichet is Out, Mario Draghi is In

Greek bonds blew up in Trichet's face and complete fools are clamoring for more of the same.

Bear in mind that Trichet steps down in October. Mario Draghi, head of the central bank of Italy takes over.

Will Germany Leave the Euro?

Will Draghi rebuff Italy's Finance Minister? The answer to that question turns our focus to the major unresolved question:

"Does Germany accept the monetization of foreign bonds at German taxpayer expense or does Germany leave the Euro?"

By Mike "Mish" Shedlock Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2011 Mike Shedlock, All Rights Reserved.

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