Enter the dragon

By Mike Peacock
October 24, 2012

Big day in Berlin with European Central Bank chief Mario Draghi entering the lion’s den of the Bundestag to explain to German lawmakers why his plan to buy sovereign euro zone bonds in potentially unlimited amounts poses no threat to the ECB’s remit and the euro zone economy.
Former ECB chief economist Juergen Stark – one of Draghi’s most trenchant critics – told us yesterday that the ECB president must present much more convincing arguments than hitherto as to why the plan would not pile enormous risks onto the ECB’s balance sheet for which European taxpayers could have to pay.

The session, which will include 10-minute introductory remarks from Draghi followed by a lengthy Q&A and then short public statements from Draghi and Bundestag President Norbert Lammert, is a rarity. The hawks in parliament will demand to know how bond-buying is remotely in line with the ECB’s mandate. The more moderate will at least want to hear what sort of conditionality the ECB wants to see before it leaps into the breach, and the backdrop is coloured by continued Bundesbank opposition to the Draghi strategy. Angela Merkel is speaking at a separate event in Berlin in, as does Wolfgang Schaeuble later in the day.

Spain will probably loom largest for the German lawmakers but Greece continues to run it a close second with suggestions growing that it will get an extra two years to make the cuts demanded of it. But even that may not be enough for the EU/IMF/ECB troika of inspectors to conclude that Athens’ debt sustainability programme is back on track. The IMF appears to believe that only a writedown of Greek bonds held by the ECB and euro zone governments will do the trick. They, predictably, are not keen.

Last night, two Greek junior coalition partners continued to oppose planned labour reforms despite a new draft document showing measures and targets agreed by the two sides said the austerity cuts would be spread over four years rather than two and an apparent concession by the troika – to row back on a plan to axe automatic wage rises. Proposals to cut wages and lower redundancy payments remain on the table.

Key ECB policymaker Joerg Asmussen is out saying that giving Greece more time means more money. The Nov. 12 meeting of euro zone finance ministers still looks to be the likeliest venue to try and finally agree a solution although there is talk of an earlier meeting doing the rounds. However, that is probably too early to tackle a Spanish sovereign aid request now with Madrid’s funding position looking manageable in the short-term and no signs of haste from that quarter. Today, parliament continues to debate the government’s budget with Prime Minister Mariano Rajoy slated to speak.

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