Trichet Drags ECB Into New Era Over Weber’s Objection
Jean-Claude Trichet has dragged the European Central Bank into a new era by pursuing direct asset purchases over the objections of Germany’s Bundesbank.
President Trichet yesterday announced the ECB will buy 60 billion euros ($80 billion) of covered bonds, taking markets by surprise after Bundesbank chief Axel Weber had campaigned against such a policy. For a central bank that’s been slow to follow counterparts around the world, the move marks a change in mentality toward battling the financial crisis.
“This is in fact a seminal day for the ECB,” said Marco Annunziata, chief economist at UniCredit Group in London. “The decision to launch direct asset purchases shows that output and inflation developments have dealt a very heavy blow to the credibility of the hard-core hawks” like Weber.
Trichet’s policy shift, pushed by smaller nations such as Cyprus, Greece, Austria and the Netherlands, is a setback for the conservative Bundesbank, which provided the blueprint for the ECB at its inception in 1998. While Weber downplayed the significance of the asset-purchase program, it will see the ECB taking more risk onto its books against his wishes.
“It’s a blow to his personal credibility,” said David Tinsley, an economist at National Australia Bank in London. “The Rubicon that’s been crossed is that the ECB will be accepting private credit risk on its balance sheet.”
‘A Few Bonds’
Weber said on April 15 that “direct interventions, such as the purchase of corporate debt, shouldn’t take priority.” He pushed instead for the ECB to lengthen the maximum maturities on its loans to banks to 12 months from six months, a measure the central bank also announced yesterday.
“We’re extending the maturities of refinancing operations with banks, that’s the important measure,” Weber said yesterday in an interview with German broadcaster ARD. “In addition we’re buying a few bonds, that’s true.”
Weber had also campaigned for the ECB to set a 1 percent floor for its benchmark interest rate. While the bank yesterday cut the rate by a quarter point to 1 percent and called that “appropriate,” Trichet said it’s not necessarily at its floor.
“We have not decided that the lowest level of rates has been reached,” ECB council member Erkki Liikanen said in Oslo today.
Council Split
ECB policy makers have been split over the best policy response to Europe’s deepest recession since World War II cash advance now. The economy of the 16 euro nations will shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S.
Athanasios Orphanides, the former Federal Reserve economist who now heads the Cypriot central bank, led the push for the ECB to engage in asset purchases and keep open the option of deeper rate cuts. The idea gained momentum when ECB Vice President Lucas Papademos floated the idea of buying corporate debt on March 26.
Still, Weber’s resistance to asset purchases, shared by Executive Board members Juergen Stark and Lorenzo Bini Smaghi, left the 22-member Governing Council divided at its April policy meeting. Trichet was forced to delay a decision on new measures until May. He said yesterday’s decisions were all “unanimous.”
Some economists said the purchase of covered bonds doesn’t represent a heavy defeat for Weber, as Germany has 57 percent of the market.
‘Nice’ Defeat
Known as Pfandbriefe in Germany, the bonds are issued by banks and backed by mortgages or public-sector loans. There were about 1.5 trillion euros of the securities outstanding in the euro region at the end of 2007, 900 billion euros of which were German, according to BNP Paribas SA.
Weber “may have lost this initial battle but he obtained the covered bond, which is very good news for German banks,” said Aurelio Maccario, chief euro-area economist at UniCredit MIB in Milan. “If this is a loss, it’s a nice one.”
The ECB’s bond plan is also dwarfed by programs in other parts of the world. It is equivalent to about 0.5 percent of euro-region GDP, according to Lloyds TSB Group Plc. That compares with debt-purchase programs in the U.K. and the U.S. amounting to 8 percent and 2 percent of GDP respectively.
The Bank of England said yesterday it will increase bond purchases by 50 billion pounds ($75 billion) to 125 billion pounds after keeping its key interest rate at a record low of 0.5 percent.
“The ECB continues to lag behind,” said Jennifer McKeown, an economist at Capital Economics in London. “We suspect that the ECB will eventually be forced into bolder asset purchases as spare capacity mounts and the risk of deflation increases.”