Disquiet at the ECB

April 13, 2012

A day for central bankers and maybe the hint of a row brewing within the ECB. After days of jitters, euro zone bond markets were calmed a little this week when ECB policymaker Benoit Coure said the central bank’s government bond-buying programme could be revived if Spain started teetering.

That is decidedly not what the orthodoxists in Frankfurt would have wanted to hear. They are already worried that the creation of more than a trillion euros of three-year money could be stoking future inflation and creating addicted banks and feel that the bond-buying programme crosses a red line — that the ECB should not fund governments.

We know Bundesbank chief Jens Weidmann has been leading the charge to at least talk about an exit strategy from the ECB’s extraordinary policy stance – something the top man, Mario Draghi, slapped down pretty bluntly last week — and Orphanides, the ECB man from Cyprus, was out last night saying individual central bankers should not be making any commitments about bond-buying, a clear swipe at Coure.

The new line-up at the ECB appears more collegiate and pragmatic than their predecessors, so don’t expect any flouncing out as the German duo Axel Weber and Juergen Stark did last year. But given that the ECB has been the consistent guarantor and decisive actor during the debt crisis so far, any signs of a split are not likely to do anything for markets’ nerves. Germany’s Joerg Asmussen, Dutch central banker Klaas Knot and France’s Christian Noyer are all speaking today.

The focus is already shifting to the IMF annual meeting which starts this time next week with Lagarde saying yesterday that more crisis-fighting funds were needed, though maybe not as much as had been thought as risks were receding (the Spanish will be heartened and maybe surprised to hear that!). The deal may not be done next week though and she emphasized that IMF resources would be devoted to protecting non-euro zone countries caught up in the turmoil. That may be the political message she needs to deliver to make headway.

Spain put another plank of its austerity drive in place last night, passing a law in parliament to allow the central government to intervene within nine months in the finances of autonomous regions that do not comply with strict deficit reduction rules. But look at the charts, and what has happened to Spanish bond yields, and it is clear from the way they have lurched up since Rajoy rejected a previously agreed deficit target that Madrid has some way to go to rebuild confidence.

There are also media reports that the Dutch government is close to clinching a deal on budget cuts which its coalition partners and opposition parties had set their face against. That’s a big deal if true. There was a real prospect of the government falling and the  causing problems for the ratification of tough new EU fiscal rules which have gone some way to convincing investors that a new debt cataclysm can be avoided.

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