Germany's Bundesbank still skeptical of bond buys

Germany's central bank, the Bundesbank, has again stressed its skepticism toward proposed purchases of government bonds by the European Central Bank, despite signs Chancellor Angela Merkel is open to the 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 fund. He noted that the Bundesbank was the sole dissenter to the plan.

The Bundesbank has only one seat on the ECB's 23-member governing council, but has added clout because it enjoys 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.

High borrowing costs on government bonds are threatening to ruin the finances of Spain and Italy, which are struggling to control their debts while their economies are in recession. If the borrowing costs stick at a high level — many market-watchers put that at 7 percent — a country would find it increasingly difficult to maintain its bond repayments and would have to turn to the other eurozone countries and the IMF for assistance. Because Italy's and Spain's economies are so large — the third and fourth largest in the eurozone — many analysts are worried that a request for a bailout would stretch the eurozone's finances to breaking point and plunge the region further into recession.

Bond purchases could drive down those costs, though an earlier, limited ECB bond purchase program failed to decisively lower them.

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

The ECB said however in a statement that it was "wrong" to speculate on the shape of future ECB interventions. It said its policies remained independent of governments and that it would act "strictly" within its mandate, which stresses preserving price stability as the first priority.

Top ECB official Joerg Asmussen, a member of the bank's six-member executive board, said in an interview that the bank's mandate is to control inflation but also includes keeping the euro from breaking up.

"Only a currency whose continued existence is not in doubt can be considered stable," Asmussen was quoted as saying by the Frankfurter Rundschau.

Draghi has called the euro "irreversible" and has said it could act to bring down high bond yields, which investors have driven up on speculation that the euro could break up. Investors would demand more interest to loan to countries if they fear their money is at risk of being converted into a different currency that is worth less.

German news magazine der Spiegel reported that the ECB was contemplating setting concrete yield caps above which it would intervene to drive borrowing rates down. The ECB replied in its statement, issued Monday, that "it is absolutely misleading to report on decisions which have not yet been taken."

The Bundesbank's objections to bond purchases are based on a view that they 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. The bank's governing council next meets on Sept. 6.