Germany's Bundesbank still skeptical of bond buys

[August 20, 2012]  FRANKFURT, Germany (AP) -- Germany's central bank, the Bundesbank, has again stressed its skepticism toward proposed purchases government bonds by the European Central Bank, despite signs Chancellor Angela Merkel is open to the ECB's plans.

The German national central bank said in its monthly report Monday that it continues to "critically assess" such purchases and that they would carry "substantial risks."

ECB President Mario Draghi said on Aug. 2 that the bank might make such purchases to lower the high interest yields faced by some governments, if those countries first applied for help from the eurozone's bailout fun. He noted that the Bundesbank was the sole dissenter to the plan.

The Bundesbank has one seat on the ECB's 23-member governing council, but has added clout because it has considerable public support among economists, legislators and the general public in Germany. Merkel, however, has sounded more open to the idea -- she indicated during a trip to Canada last week that the ECB was in line with European governments in being willing to do everything possible to save the euro.

Spain's economy minister, Luis de Guindos, over the weekend said the ECB should make purchases without setting any limit.

High borrowing costs on government bonds are threatening to ruin the finances of Spain and Italy. Bond purchases could drive down those costs, though an earlier, limited ECB bond purchase program failed to decisively lower them.

The Bundesbank's objections are based on a view that the purchases come too close to bailing out government finances, which the ECB is forbidden to do by the European Union treaty. Such purchases also could mean other countries could share in any losses on those bonds -- a decision about the use of taxpayer money that belongs with governments, not the central bank.

To get the ECB to buy bonds, Spain would have to first apply for assistance to the eurozone's bailout fund, which could impose policy conditions such as reducing deficits or reforming the economy.

The ECB has not said how big the purchases would be or whether they would target a particular interest rate level.

[Associated Press]

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