FRANKFURT (MNI) – In an unusual move, the European Central Bank
Monday dismissed a media report that said the central bank may be
planning to cap borrowing costs for Eurozone peripheral states.

After adhering to its customary “no-comment” policy early on
Monday, the ECB reversed course later in the day to issue a statement
rebutting the report. The move highlights anxiety in the Eurotower over
the prospect of a new bond purchasing program, which is on the drawing
board.

The ECB may have reacted to the report with particular sensitivity
because it raises market expectations of aggressive central bank
intervention which the Governing Council could prove incapable of
delivering.

“It is absolutely misleading to report on decisions which have not
yet been taken and also on individual views, which have not yet been
discussed by the ECB’s Governing Council, which will act strictly within
its mandate,” a central bank spokesperson said in an e-mailed statement.

German magazine Der Spiegel reported over the weekend that the ECB
was mulling the establishment of pre-determined yield thresholds which
would trigger its intervention in sovereign bond markets.

Markets would no doubt welcome pre-defined caps that commit the ECB
to unlimited bond buys and remove uncertainty over sovereign refinancing
costs.

However, announcing such targets could weaken the ECB’s ability to
enforce conditionality on governments and might thus be viewed
skeptically by Governing Council members who are willing to approve new
bond purchases only if they are tied to strict conditions.

A spokesman for the German Finance Ministry said that “in purely
theoretical, abstract terms, [a yield cap] would certainly be very
problematic.” His comment raises concerns that the German government
could withdraw its recent verbal backing for Draghi’s plans.

In its e-mail on Monday, the ECB told governments in no uncertain
terms to mind their own business. “As far as recent statements by
government officials are concerned, it is also wrong to speculate on the
shape of future ECB interventions. Monetary policy is independent and
undertaken strictly within the ECB mandate,” the bank said.

Still, to avoid other policymakers joining Bundesbank President
Jens Weidmann’s opposition, Draghi may have to ensure that the desire of
hawkish Council members for tough conditionality will be met. Draghi
will no doubt seek to avoid a broad public disagreement over bond market
interventions, which would only undermine their effectiveness, as
happened under the now-dormant Securities Market Programme.

The Bundesbank appears prepared keep up its resistance against bond
buys. “The Bundesbank maintains its view that government bond buys in
particular should be assessed critically and that they come with
significant risks for stability policies,” the German central bank said
Monday.

“Decisions regarding yet more pronounced pooling of solvency risks
should be made through fiscal policies – that is, governments and
parliaments – and should not be carried out via the central bank balance
sheets,” the Bundesbank added.

ECB Executive Board member Joerg Asmussen said in an interview with
Germany’s Frankfurter Rundschau on Monday that the Governing Council is
still “working on the design of the new program,” and any predictions at
the current juncture would be speculative at best.

The ECB may well fear that such speculation will feed market
expectations that the central bank cannot meet, and that could provoke
fresh market tensions following next month’s Governing Council meeting.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@mni-news.com

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