ECB will stay within mandate, assures board member

BERLIN: The European Central Bank will stay within its mandate and intervene on the secondary debt markets only in conjunction with European Union rescue funds, board member Joerg Asmussen said on Monday.

"We will act within the framework of our mandate," Asmussen said in a speech in Germany, while insisting on the "complete independence" of the ECB.

Earlier this month, ECB chief Mario Draghi suggested the central bank could restart buying bonds of crisis-hit member states to drive down their crippling borrowing costs, following trouble in Spain and Italy.

The ECB "may undertake outright open market operations of a size adequate to reach its objective," Draghi had said.

But over the weekend in Der Spiegel magazine, German central bank chief Jens Weidmann, who sits on the ECB governing council, criticised as dangerous any plan by the ECB to buy member states' bonds, warning countries could get "hooked" on the intervention "like a drug".

"For me such a policy comes close to financing states with the printing press," Weidmann told the magazine.

"The manna from central banks will forever sharpen greed," the Bundesbank chief said. "One should not underestimate the danger that financing by central banks can get one hooked like a drug."

The German finance ministry also has concerns about any buying of states' bonds by the ECB, which it fears could compromise the Frankfurt-based bank's independence, Der Spiegel reported .

The magazine noted "fierce arguments" within the ECB itself over the form of the programme between representatives of countries such as Spain or Italy and those from northern Europe who think it should be used only in "extreme situations".

Former German deputy finance minister Asmussen, who is considered a monetary conservative, said the ECB would only intervene in parallel with the European Financial Stability Facility and its successor the European Stability Mechanism, EU funds that offer rescue loans in return for strict controls on national budgets.

Asmussen repeated Draghi's comments that the ECB would only intervene on short-term debt and said that the programme was still in development.

In 2010 the ECB carried out a bond-buying blitz under the Securities Market Programme (SMP) to help debt-wracked eurozone countries that were finding it difficult to drum up financing in capital markets.

The controversial programme, that pushed key figures at the ECB to resign, has lain dormant since February.

At one point, purchases reached as much as 22 billion euros in a single week, mainly in bonds from Greece Ireland, Portugal, Italy and Spain.

ECB breaks new ground in crisis fight

FRANKFURT: The European Central Bank has broken new ground in the eurozone crisis with hints that it could start unlimited buying of stricken member states' bonds to drive down their crippling borrowing costs.

After initial disappointment at ECB head Mario Draghi's failure to take immediate action to help ailing countries at a meeting Thursday, many analysts were more encouraged after giving his remarks a second reading.

Draghi said the central bank could intervene directly in the bond markets under a programme known as SMP to help countries left high and dry in the crisis but this depended on governments holding up their end of the bargain.

He also said the ECB might consider additional measures to calm markets which have driven borrowing costs for Italy and Spain back near to levels that forced Greece, Ireland and Portugal to seek massive bailouts.

Under the SMP programme launched in May 2010 and suspended four months ago, the ECB had said its purchase of sovereign bonds was limited in both time and amount.

Christian Schulz of Berenberg bank said the ECB had "finally stepped up to the plate meaningfully" which could help head off further trouble.

"If the ECB convinces markets that it is providing a reliable safety net for solvent sovereigns which stay on the reform path, it may lure more investors back into these markets," he said.

"In that case, the ECB may not have to buy many bonds."

Draghi's comments Thursday disappointed markets expecting immediate action but on Friday, it was the complete reverse with Madrid and Milan soaring by 6.0 percent and more -- albeit helped too by better-than-expected US jobs data.

Borrowing rates for Spain and Italy remained dangerously high, however, but were down sharply after spiking on Thursday.

The ECB chief also stipulated that it would only intervene if Europe's rescue fund, the European Financial Stability Fund, and its permanent successor, the European Stability Mechanism, were also involved.

This would require countries in dire straits asking for bailouts, which go hand-in-hand with strict reform conditions and targets -- hard to swallow medicine for any government.

Erik Nielsen of Unicredit said he was concerned by such strings attached to aid and predicted a potential dilemma in the event of a government failing to reach agreement with the EFSF/ESM.

"Do they stick with their new doctrine and refrain from intervening and accept what could well be sovereign default, or do they risk their credibility?" he said, describing the potential catch-22.

However, the principle of conditionality is important, especially for the German central bank, the Bundesbank, which has repeatedly stressed its opposition to the bond-buying programme.

The bank, representing the interests of the eurozone's top economy and paymaster, argues that such moves in effect subsidise public deficits, run counter to the ECB's statutes and pose a serious threat to price stability.

But in an environment in which there seems little imminent danger of high inflation, German public opinion seems to be changing, according to a running theme in several newspaper editorials.

"In light of the drama (in the eurozone), you have to say that the narrow view of the Bundesbank no longer corresponds to the current reality in Europe," the daily Sueddeutsche Zeitung said.

Business daily Handelsblatt voiced concerns that the Bundesbank could end up isolated, particularly as German Chancellor Angela Merkel and her trusted finance minister, Wolfgang Schaeuble, welcomed Draghi's much-heralded pledge last week to "do everything" within the ECB's statutes to protect the euro.

"They have done and continue to do whatever they can within fairly strict limits imposed on them," said Gilles Moec of Deutsche Bank said, noting that the US Federal Reserve and the Bank of England had more room to manoeuvre.

"Draghi went as far as he could, in our view, to indicate in no uncertain terms that massive ECB support would be available as soon as the potential recipient countries -- presumably Spain and Italy -- accept to trigger the European support procedure."

In an upbeat assessment, Moec said that the ECB had "changed the way the current sovereign turmoil should be seen ... Draghi in our view is on his way to deliver on his promises from last week."

Europe chooses closer integration to fix euro crisis

LOS CABOS, Mexico: Europe's major powers moved towards greater financial integration on Tuesday, in a G20 summit declaration aimed at boosting confidence in the bloc's plans to fix its spiraling debt crisis.

"We support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance," the joint G20 statement said.

Backed by key EU members including Germany, France and Britain, the communique followed two days of talks in the Mexican beach resort of Los Cabos in which European leaders came under strong pressure to take firm and quick action.

Beyond the moat-ringed conference center in the hills above San Jose del Cabo, bond markets jacked up rates on Spanish and Italian debt amid self-fulfilling fears that the debt crisis that sank Greece was spreading once again.

The G20 statement said eurozone members will "take all necessary measures" to stabilize the single currency bloc, including moves to "break the feedback loop" that has weak governments piling on more and more debt to bail out their banks.

In addition, should economic conditions worsen, the countries with more financial flexibility "stand ready to coordinate and implement discretionary fiscal actions to support domestic demand," it said.

The United States, the International Monetary Fund and the European Central Bank have all urged greater banking integration in Europe, hoping to instill more confidence as banks falter in some of the worst-hit nations.

US President Barack Obama, worried Europe was not moving resolutely enough to contend with the debt crisis, huddled in a special meeting with European leaders, fearful that economic turmoil could torpedo his hopes of re-election in November.

Obama met Tuesday with Germany's Angela Merkel, France's Francois Hollande, Spain's Mariano Rajoy, Italy's Mario Monti and Britain's David Cameron as well as European Union chiefs Jose Manuel Barroso and Herman van Rompuy.

Shortly after the Obama-EU meeting, the wording of the final G20 communique was confirmed but there were few clues given about the path forward -- perhaps because Europe's leaders gather in Brussels at the end of the month.

The new element was the move towards a banking union. Europe-wide guarantees on deposits and a central authority to close banks that go bust are seen as a way to promote the flow of cash through the system and give more confidence to lend.

Supporters believe union would break a cycle in which banks are obliged to rely on their own troubled countries' governments and central banks, creating a vicious cycle of mounting debt that brings down all of the institutions.

Germany, the largest economy in Europe, has resisted debt burden-sharing out of concern that its own comparatively healthy system will be obliged to help out weaker banks in countries that have lacked discipline.

Merkel remains the driving force behind the eurozone's determination to privilege austere deficit busting over stimulus spending, although US officials say her position is softening.

"In Los Cabos the seeds of a pan-European recovery plan were planted," said IMF managing director Christine Lagarde.

"European leaders committed to take all measures necessary to safeguard the integrity and stability of the euro area and break the feedback loop between sovereigns and banks," Lagarde said.

"Their intention to consider concrete steps towards a more integrated financial architecture is important."

The G20 summit followed hot on the heels of Sunday's pivotal polls in debt-ridden Greece, where parties committed to the terms of their EU and IMF-led bailout held off a strong challenge by a leftist anti-austerity party.

The IMF has indicated that it could now be open to a renegotiation of Greece's 130-billion-euro ($165 billion) bailout program.

But hopes that the Greek vote had helped the single currency bloc turn a corner in the crisis were dashed as attention moved onto the fragile economies of other EU members and Spanish borrowing costs soared to record levels.

US officials have called for Greece to be given more time to get its affairs in order, but Merkel remained unmoved.

"Elections cannot call into question the commitments Greece made. We cannot compromise on the reform steps we agreed on," she told reporters on Monday.

Progress was made in Los Cabos in boosting the resources available to the IMF to help protect vulnerable countries from the backwash of the eurozone crisis.

China led emerging powers in topping up pledges to bring the new pool for emergency loans up to $456 billion (361 billion euros), though only in exchange for a greater say in Fund affairs.

Heat on ECB to act as eurozone crisis deepens

FRANKFURT: The European Central Bank is coming under increasing pressure to come to the rescue once again as the eurozone debt crisis deepens, with analysts suggesting it could cut interest rates soon.

The ECB's governing council usually convenes on the first Thursday of every month for its regular policy-setting session but it is meeting in the bank's Eurotower headquarters on Wednesday owing to a public holiday.

While the majority of ECB watchers believe the bank could cut borrowing costs very soon from their current historic low of 1.0 percent, most analysts believe it will not act this month, preferring to keep its options open.

"With the euro area crisis deteriorating, there is a lot of pressure on the ECB to act but in our view it is unlikely to announce any specific new measure this Wednesday, while obviously keeping the door open to intervene should the crisis worsen," said Silvio Peruzzo of RBS European Economics.

At the meeting, the ECB will also publish its latest quarterly staff projections on inflation and growth which could highlight the downside economic risks for the 17 countries that share the euro.

The figures could bolster the case for a rate cut.

Italian Mario Draghi -- who took over as ECB president last November -- has certainly not shied away from surprise moves in his short career at the helm so far.

Nevertheless, "while flagging the materialisation of further downside risk and the increased uncertainty about the growth outlook, the ECB might want to wait for further corroborating data to conclude that its second half of the year recovery expectations are challenged and hence cut rates," said Peruzzo.

He predicted a rate cut in July, "but we do not exclude the possibility that the ECB might pre-announce it this week, recognising the increasing downside risk to the economy."

ING Belgium economist Carsten Brzeski said the ECB "is caught between a rock and a hard place: opening the fire hose again could lead to political complacency, while doing nothing could accelerate the latest market turmoil."

It will be a "close call," Brzeski said, but he thought it "rather unlikely that the ECB will use the new room for manoeuvre ... this week."

The ECB "looks tired from being the eurozone's fire brigade and seems to have a preference for staying on hold. Despite latest developments in Greece and Spain, it looks likely that the ECB will want to keep pressure as high as possible to tackle political complacency," the analyst predicted.

The ECB has never hesitated to act from the very beginning of the crisis.

It quickly reversed last year's rate hikes to bring eurozone borrowing costs back down to an all-time low of 1.0 percent and embarked on a hotly contested programme of indirectly buying up the bonds of debt-mired countries.

Most recently, in two so-called long-term refinancing operations (LTROs) in December and February, it pumped more than 1.0 trillion euros ($1.25 trillion) into the banking system to avert a dangerous credit squeeze in the euro area.

Nevertheless, ECB officials have all along insisted that such measures cannot cure the root cause of the crisis -- profligate spending by governments.

Natixis economist Cedric Thellier believed the ECB would probably wait until its next meeting in July -- by which time the outcome of Greek elections on June 17 will be known -- before taking any further action.

Greece is heading to the polls for a second time in six weeks after an inconclusive vote on May 6. With the radical leftist Syriza party, chief opponent of a massive EU-IMF bailout accord, tipped to win this time, the election could lead to Greece quitting the single currency.

"We guess (Draghi) will try to save time and ammunition in case of an unfavourable outcome from Greek elections on June 17 and European summit on June 28," Thellier said.

"Then, further support from the ECB might be necessary" in the form of a rate cut or a third LTRO, he added.