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ECB’s Trichet Rejects Weber’s Call to End Bond Purchase Program

Monday, 18 Oct 2010 01:35 PM

European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber’s call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances.

“This is not the position of the Governing Council, with an overwhelming majority,” Trichet said when asked to respond to Weber’s Oct. 13 call for an end to the program, according to the a transcript of an interview published yesterday in Italian newspaper La Stampa.

Weber, who also sits on the ECB’s 22-member decision-making council, said the risk of “exiting too late” from the emergency measures was greater than pulling out too soon. The remarks, the strongest from any ECB official advocating a removal of stimulus, came as governments and banks in Ireland, Portugal and Greece struggle to convince investors they can control their finances in the aftermath of this year’s sovereign debt crisis.

“Trichet is sending a clear signal to Weber,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “The majority seems to favor a safety belt option for the moment and isn’t comfortable with sending conflicting signals to the markets.”

Extending Backstop

Trichet also backed the possibility of extending in some form the European Union’s temporary financial backstop for financially stressed nations. The EU set up the European Financial Stability Facility in June after Greece’s near default led to soaring borrowing costs for other high-deficit nations. The 440 billion-euro ($614 billion) emergency fund is set to be shut down in June 2013 if no loans are made by then.

Extending the aid mechanism “could be imagined in the future,” he said at a press conference yesterday in Rimini, Italy. “We would then have to respect a number of criteria.” Any aid program should not encourage “moral hazard and it should be based on a very, very strong conditionality.”

The ECB started buying government bonds in May after agreeing to support the EU-led package of 110 billion euros of emergency loans for Greece. The purchases were part of the EU- wide push to rescue the euro, which fell to a four-year low on June 7, after the Greek crisis threatened to undermine the 16- nation currency bloc.

“This non-standard measure, like all other such measures, was designed to help restore a more normal functioning of our monetary policy transmission mechanism,” Trichet said, according to the la Stampa interview.

Sole Spokesman

Trichet also said that as ECB president he is the only one who speaks on behalf of the Governing Council. Weber, who opposed the bond purchases since their inception in May, is regarded by economists as a frontrunner to succeed Trichet when his non-renewable eight-year term expires in just over a year.

“There is only one single currency; there is one Governing Council, only one monetary policy decision, and one president, who is also the porte-parole of the Governing Council,” he told La Stampa.

“Trichet’s comments highlight that he is not pleased with the ongoing public criticism of some council members regarding the securities market program,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London. “Trichet’s comments highlight that the program will continue.”

Weber’s fellow council member, Austria’s Ewald Nowotny, also opposed terminating the bond-purchase program. “It makes sense to use it as a safety belt,” Reuters cited him as saying Oct. 13. “I would not throw it away too early.”

Purchases ‘Temporary’

ECB Executive board member Juergen Stark said in an interview with Germany’s Handelsblatt on Oct. 15 that the bank will keep buying government bonds “as long as necessary.” Still, in a speech at the same day he added the bond purchases are “temporary in nature.”

To avoid having to fall back on emergency support measures, Trichet said the euro region must adopt “more ambitious” rules to force members to control their budget deficits that should include “greater automaticity” in doling out punishments for those who violate deficit limits.

“All deadlines under the excessive deficit procedure should be significantly reduced: sanctions should be applied quasi- automatically on the basis of clearly defined criteria, without scope for discretion for exceptional circumstances or waivers,” Trichet said in a speech in Marrakech on Oct. 16. “The debt reduction should in some cases be more ambitious than proposed by the commission,” Trichet said.

Ministers Meet

EU finance ministers meet in Luxembourg today to consider European Commission proposals to fix budget management and avoid runaway deficits that led to Greece’s near-default. France is balking at calls for the faster imposition of sanctions on deficit-ridden governments, putting it at odds with Germany and the ECB over how to prevent a repeat of the debt crisis.

Trichet reiterated that the current interest-rate level was “appropriate” and said in the la Stampa interview that the inflation expectations in the euro-region were “extremely well- anchored” for the next 5 to 10 years.

The central bank had a “very, very remarkable track record” on maintaining price stability, with the euro region having an average inflation rate of 1.97 percent, in line with the ECB’s 2 percent ceiling, in the 11 1/2 years that the ECB has been in charge of monetary policy. Raising the central bank’s inflation goal would have “disastrous consequences” he said in Marrakech.

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European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber s call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances. This is not the position of the Governing...
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