ECBs Lautenschlaeger Opposes Government Bond Purchases European Central Bank executive board member Sabine Lautenschlaeger on Saturday signaled she would oppose having the ECB purchase government bonds of eurozone countries unless there was a clear threat of persistent consumer price declines. Her remarks, from a prepared speech at a conference in Berlin, contradicted the more urgent message conveyed recently by ECB President Mario Draghi and his top deputy Vitor Constancio to bring inflation higher. And her comments suggest that if the central bank does press ahead with government bond purchases, it risks doing so despite opposition from the euro blocs most powerful member, Germany. In my view, a consideration of the costs and benefits, and the opportunities and risks of a broad purchase program of government bonds doesnt give a positive outcome at the current time, Ms. Lautenschlaeger said at the conference sponsored by the German newspaper Süddeutsche Zeitung. Central banks in the U.S., U.K. and Japan have used this policy, known as quantitative easing, to reduce long-term interest rates and raise borrowing and spending. Mr. Constancio signaled Wednesday that the ECB may follow suit early next year if it decides that current stimulus programs--which include cheap loans to banks and purchases of covered bonds and asset backed securities--are insufficient to increase the ECBs balance sheet, the value of assets it holds, back to early 2012 levels. The implies a rise of about EUR1 trillion ($1.24 trillion). During the first quarter of next year, we will be able to better gauge if the balance sheet will rise as expected, he said. If not, we will have to consider buying other assets, including sovereign bonds in the secondary market, the bulkier and more liquid market of securities available, he said. His comments fanned hopes that the ECB would launch quantitative easing as soon as January. These expectations intensified Friday after the European Unions statistics office reported that annual eurozone inflation weakened to 0.3% in November, far below the ECBs target of just under 2%. But Ms. Lautenschlaeger sent a strong signal that she isnt ready to take that step. Long-term interest rates were much higher when other central banks launched public debt purchase programs, she noted. In the euro area, the long-term interest rates on Spanish and Italian government bonds, for example, are already lower than those from the United States or the United Kingdom, she said. It is therefore questionable whether we should depress interest rates for the securities class even further. The eurozone is also more reliant on banks than capital markets for lending to the private sector, she said, another factor that may weaken the effects of quantitative easing. Therefore with regard to the purchase of government bonds, measures which are obvious in one place could be the last resort at best for us--for instance when there is the threat of deflation, but only if the cost-benefit analysis is favorable, she said, adding that for the moment there are more questions than answers. Her comments underscore that challenge Mr. Draghi faces if he decides to push forward with government bond purchases. The other German official on the ECBs 24-member governing council, Bundesbank President Jens Weidmann, has also signaled his fierce opposition to quantitative easing. Mr. Lautenschlaeger was Mr. Weidmanns deputy at the Bundesbank bank before she joined the ECBs rate-setting board in January 2014. Mr. Draghi could cobble together a majority of the governing council even without the two German officials. However, given that central bank purchases of public debt are very unpopular in Germany, where the policy stirs fears of inflation and a loss of central bank independence, dissent from Mr. Weidmann and Ms. Lautenschlaeger would be a symbolic blow.
Posted on: Sat, 29 Nov 2014 11:27:21 +0000
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