Bundesbank Opposes ECB’s Bailout Plan

The Bundesbank (German central bank) opposition to the European Central Bank’s plan to help ailing financial institutions is its latest swipe at the crisis-fighting efforts of Mario Draghi’s central bank.

As Spanish banks scramble for collateral to use in the refinancing operations that are keeping them afloat, the Frankfurt-based ECB said it will cut the rating thresholds and amend eligibility requirements for some asset-backed securities. While the move will give stressed banks greater access to ECB liquidity, it may also increase the amount of risk on the central bank’s balance sheet.

“We’re critical of this,” Bundesbank spokesman Michael Best said yesterday. In terms of collateral, “we won’t accept what we don’t have to accept,” he said.

The criticism highlights one of the fault lines dividing European officials as they struggle to end a crisis threatening to rip the currency union apart. As Draghi’s officials scramble to put together policies that will fight the latest stage of the turmoil, German policy makers are emphasizing the dangers of pursuing unorthodox policies that potentially put taxpayers on the hook for future losses. “It’s almost the usual game: the ECB has to do something to alleviate a liquidity crisis and the Bundesbank isn’t very happy about it,” Holger Schmieding, chief economist at Berenberg Bank in London, said in a telephone interview. “The Bundesbank being critical doesn’t fully counteract what the ECB is doing, but possibly makes it a little less effective.”

Looser collateral is the latest issue to divide Europeans days before a summit that Italian Prime Minister Mario Monti said must succeed or risk a bond-market selloff. German policy makers are reluctant to put too much on the line to help debt- strapped nations before they fix their budgets and banks. French and Italian leaders are pushing for a wider range of crisis- fighting tools.
Those debates have flared on the ECB’s Governing Council too. Two years ago, the German central bank came out and opposed the ECB’s unprecedented decision to buy the bonds of distressed nations as part of a broader push to stamp out a crisis that was starting to spread from Greece. While the German central bank ultimately went along with the plan, it has since been largely shelved and deemed ineffective by most ECB officials, Bloomberg reported.