Weidmann warns he will oppose expanded ECB bond buying

Weidmann warns he will oppose expanded ECB bond buying

Bundesbank president sets out fresh argument against changing stimulus programme’s rules

The next battle lines at the European Central Bank are taking shape after the head of Germany’s Bundesbank warned that he would oppose any attempts to lift limits on its programme of bond purchases.

The ECB operates under self-imposed curbs on how much of a eurozone member state’s debt it can own — currently one-third of a state’s outstanding stock of bonds. Jens Weidmann has long been worried that if those limits were dismantled, the Bank would in effect be underwriting a country’s budget.

Now Mr Weidmann has said he hopes the ECB’s recent relaunch of its bond buying would “not lead to these restrictions being called into question”, adding that “nothing has changed in the correctness and importance of the limits”.

His warning underlined how Christine Lagarde could soon have a fight on her hands after she takes over from Mario Draghi as ECB president at the end of this month, if — as expected — she decides to loosen monetary policy further in the face of the eurozone’s mounting economic slowdown.

Last month Mr Draghi announced a package of easing measures that triggered unprecedented opposition within the top echelons of the ECB. The package included a resumption of the ECB’s quantitative easing programme of bond buying, which it launched in 2015 and ended in December 2018 after purchasing €2.6tn of sovereign and corporate debt.

The ECB said it would start buying €20bn of bonds per month from the start of November and — in contrast with its previous programme — did not put a time limit on the purchases.

The ECB’s limit on how much of a country’s debt it can buy was set when Mr Draghi launched QE four years ago. Known as the issuer limit, it was designed to prevent the ECB from holding enough of any one country’s debt to have the power to block a potential restructuring.

The central bank also committed to only buy sovereign bonds in proportion to the size of each eurozone country’s economy and population, to prevent it from being accused of favouring any particular countries.

Some economists believe these limits inhibit the future prospects for the QE programme because the ECB already owns close to 33 per cent of some countries’ bonds, including Germany’s.

Mr Draghi said last month that the ECB had “relevant headroom to go on for quite a long time at this level without a need to discuss limits”. Yet many analysts believe that the ECB can only continue buying bonds for about a year before it will need to raise the issuer limit.

Mr Weidmann, who for several years has been the leading opponent of the ECB’s bond-buying programme, said in a speech on Tuesday evening: “In a monetary union with fiscal autonomy for the member states, it is important to ensure that the dividing line between monetary and financial policy does not blur.

“The reaction of the central banks to the crisis has also awakened desires with regard to the Eurosystem, which it should not be able to fulfil.”

The Bundesbank boss added that he regretted the recent resignation of Sabine Lautenschläger, his fellow German on the ECB’s governing council, after she expressed her opposition to restarting QE.

“Her voice has also enriched the council and will be missing in the future,” he said. “The diversity of opinions and perspectives has always been the strength of this body, not a weakness.”

 

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