The European Central Bank’s plans to buy rebundled packages of debt have drawn sharp criticism from officials in Germany, including the head of the Bundesbank, the ECB’s former chief economist and allies of Chancellor Angela Merkel.
On Thursday, the ECB laid out plans to buy reparcelled debt and covered bonds, secured on solid assets such as property. It will include buying debt with a “junk” credit rating from Greece and Cyprus as long as such countries are under a formal international financial programme.
Bundesbank chief Jens Weidmann warned in German magazine Focus yesterday that there was a danger the ECB would buy “low-quality loan securitisations” at inflated prices as part of its programme to buy so-called asset-backed securities (ABS).
ABS are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now the ECB.
“Then the credit risks taken by private banks would be transferred to the central bank and therefore taxpayers without them getting anything in return,” said Weidmann, who is also an ECB policymaker.
“But that goes against the basic principle of liability that is fundamental to a market economy: Those who derive benefit from something should bear the loss if there are negative developments,” he was quoted as saying.
Weidmann added that the global financial crisis had shown how dangerous it could be to abandon this principle.
He also warned against devaluing the euro: “A policy which tries to deliberately weaken the currency would also provoke counter reactions. There can ultimately only be losers in such competitive devaluation,” he said.
ECB President Mario Draghi said last week the ECB did not have a target exchange rate for the euro but policy loosening by the ECB at a time when the US Federal Reserve is winding down its asset-purchasing programme has been driving the euro lower.
Former ECB chief economist Juergen Stark, a German who resigned in 2011 in protest over the ECB’s intervention in the government bond markets, said in an interview with Focus that the ECB’s unconventional measures were “an act of desperation”.
Stark, a former ECB executive board member, said the ECB was giving in to financial market expectations and political pressure from France and Italy rather than showing leadership.
He said while he was not surprised that politicians in Paris and Rome were calling for a devaluation of the euro, “the fact the ECB is giving in to this and justifying measures with a targeted weakening of the euro shows the extent to which it is on the wrong track now. There are no taboos there anymore”.
Stark said the ECB would put “incalculable risks” on its balance sheet with its ABS programme and eurozone taxpayers would be liable for these in case of losses.
“That could lead to significant redistributive effects between member states. The ECB has no democratic legitimation for this,” he said, adding that the plan to purchase ABS to revive this market had “nothing to do with monetary policy”.
Two senior allies of German Chancellor Angela Merkel also criticised the ECB over its ABS purchase plans.
Hans Michelbach, a leading member of Merkel’s Bavarian sister party, said the ECB chief appeared to be at “his wit’s end” and was turning the institute into a “junk bank” with his plans to buy debt rated as junk.
Michelbach, chairman of the conservative faction in the parliamentary financial committee, told Reuters on Saturday the ECB now wanted to buy the kind of “opaque debt” that was largely to blame for the outbreak of the global financial crisis in 2007/2008. He said the ECB was making a mockery of countries that had undertaken reforms.
Norbert Barthle, a budget expert in Merkel’s Christian Democrats (CDU), told Focus he was concerned that non-performing loans would end up in the German taxpayers’ lap.
“Redistributing risks in this way is not one of the central bank’s tasks,” he said.