Courtesy of Mish.
On Friday, ECB President Mario Draghi announced ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral. Reaction from the German central bank was immediate: Bundesbank Swipes at Draghi as European Fault Lines Deepen
“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.
Fault Lines
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.
Weidmann Letter
In February, Bundesbank President Jens Weidmann wrote to Draghi warning of the risks the ECB is taking in lending more than 1 trillion euros ($1.3 trillion) to banks. The ECB’s Target2 system, which calculates debts between the euro region’s central banks, shows that the amount owed to the Bundesbank has soared as Germany helps fund the region’s most indebted nations.
Earlier this year, the German central bank shunned another measure aimed at easing collateral requirements.
The ECB’s latest announcement is a “clear sign that the Bundesbank opposes any further increase in risks on the euro system’s balance sheet,” said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.
Target2 and ELA Explained
If you do not know what target2 balances are, or if you want to understand how much Germany is really at risk of (most have it wrong), then please see Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks “Can You Please Explain Target2?”
Do Central Banks Face “Power Limits”?
In light of loosening collateral standards by the ECB to one step above junk, some might be wondering about limits on central bank actions. …
