German central bank chief Jens Weidmann's reported threat to resign has piled pressure on European Central Bank President Mario Draghi to assuage his opposition to a new bond-buying plan without tying it up in so many knots it is rendered ineffective.
A Bundesbank spokesman declined to comment on Friday on a report in the mass circulation Bild newspaper that Weidmann, who has stressed his opposition to the strategy, had considered resigning several times in recent weeks but had been dissuaded by the German government.
Draghi is skipping this weekend's Jackson Hole policymakers' retreat to try to forge agreement. The Italian will have little time to celebrate his 65th birthday on Monday as he tries to seal a deal before a Sept. 6 ECB policy meeting.
The ECB is preparing to ease painful borrowing costs in Spain and Italy, in the teeth of Bundesbank opposition, to buy the eurozone governments time to negotiate legal and political hurdles to a longer-term response to the eurozone crisis.
"Opposition from Weidmann and reservations from some other Council members will mean that ECB bond purchases would be highly conditional, be focused on the short end and would not aim to bring yields down quite as much as Italy and Spain might like to see," said Berenberg economist Holger Schmieding.
Securing majority support for a plan Weidmann can live with represents the biggest balancing act Draghi has faced since he took over the ECB presidency on Nov. 1 last year.
He has already said any new ECB intervention will be conditional on the country affected first seeking help from the eurozone's rescue funds and agreeing to the austerity-centered reforms tied to such aid.
But go too far in trying to calm the Bundesbank and Draghi risks ending up with a dud of a plan that has no impact on markets. Not go far enough and he risks more Bundesbank sniping.
Draghi's allies are already talking tough.
ECB policymaker Joerg Asmussen said late on Thursday the ECB should only buy sovereign bonds if the International Monetary Fund is involved in setting the economic reform programs that should be a condition for intervention.
The IMF is notorious for tying strict conditions to aid and Madrid is likely to take a dim view of that notion.
Spanish Prime Minister Mariano Rajoy has said he will not ask for any further help, to add to a bailout of Spanish banks worth up to 100 billion euros, until the ECB's strategy is clear.
But with Spain's important northeastern region of Catalonia calling for government help this week and recession deepening, some form of outside assistance is increasingly likely.
Draghi's July 26 vow to do "whatever it takes" to save the euro heralded his signature plan. He must now deliver to put his stamp on the ECB and seal its shift away from the Bundesbank's stability model to a more pragmatic institution.
"It needs to be credible in the eyes of the markets," one ECB source said of the new program, adding that policymakers were aiming to have it ready for their meeting next Thursday.
The source, speaking on condition of anonymity, did not think the ECB would announce a target for bond yields, or aim for a specific spread - the premium other sovereigns' paper trades over the German benchmark.
Investors are ready to give the ECB some time to get on top of the crisis but any signs of a silver bullet being delayed beyond the bank's Oct. 4 meeting will have fingers hovering over the "sell" button on stocks, bonds and the euro.
Markets soon found the ECB had little appetite to spend more than 20 billion euros a week on its existing bond-buy program, the now mothballed Securities Markets Program (SMP), when it extended that plan to buy Spanish and Italian debt a year ago.
The SMP, launched in May 2010, was hobbled from the outset by the Bundesbank's then president, Axel Weber, voicing his deep misgivings over the program just as soon as it was born.
Weber quit over the SMP in 2011. Weidmann indicated to Der Spiegel magazine at the weekend he planned to stay at his post.
"I can do my task best if I stay in office. I want to work to ensure that the euro is just as hard as the mark was," Weidmann told Der Spiegel in an interview released on Sunday.
The Bild report and Weidmann's opposition to the new round of bond buying, which he says could be "addictive like a drug," mean Draghi must attach strings to the plan to keep pressure on governments to reform and tighten their budgets.
ECB policymakers, led by Weidmann, are fretting about the effectiveness of such conditionality. The problem is that for governments faced with austerity and economic contraction, it pays to renege on any deal once the ECB's actions are in place.
The ECB was hurt by its experience last year of buying Italian and Spanish bonds, only for Italy's then-prime minister, Silvio Berlusconi, to go back on reform promises he had made to get the ECB to step in just days after he made the commitments.
Once the new bond-buying plan is born, Weidmann will likely not be involved in running it day-to-day. The tactics of how to use the SMP were decided on a daily basis by the ECB's six-member Executive Board, on which Weidmann does not sit.
Weber's misgivings nonetheless show the Bundesbank can undermine ECB policies, and some worry Weidmann could do this.
"My fear is that his own decision will stand on principle, but that by being so outspoken beforehand, he hopes to limit the extent of the operation," the ECB source said. "That would constantly put a question mark over how far we could go."
Weidmann does not have enough allies within the ECB to block the plan, sources say, though in a weekend interview with Germany's Der Spiegel magazine, which ran a headline 'Rebellion of the Bundesbank' on its front page, the German central bank chief said: "I hardly believe that I am the only one to get stomach ache over this."
© 2024 Thomson/Reuters. All rights reserved.