| FRANKFURT, July 27
FRANKFURT, July 27 Germany's powerful Bundesbank
pushed back on Friday against European Central Bank President
Mario Draghi's pledge to do whatever is necessary to protect the
euro zone from collapse, but markets rallied on a report of
imminent policy action.
French newspaper Le Monde reported that the ECB and euro
zone governments were preparing co-ordinated action to cut
Spanish and Italian borrowing costs. European shares extended
gains to trade some 1 percent higher after the report's release.
The newspaper, citing unnamed sources, said the ECB was
willing to take part in the action if governments agreed to tap
the bloc's bailout funds, the European Financial Stability
Facility (EFSF) and the European Stability Mechanism (ESM).
The report came a day after Draghi, in his boldest comments
since taking the ECB's helm last November, pledged to do
whatever was necessary to protect the euro zone from collapse.
Markets took Draghi's pledge as a signal that the central
bank is ready to defend Italy and Spain, whose borrowing costs
have hit unsustainable levels, by buying their bonds.
But the Bundesbank regards central bank purchases of
sovereign debt as monetary financing of governments, from which
the ECB is prohibited by European law. The German national
central bank's resistance could narrow the ECB's options.
"The mechanism of bond purchases is problematic because it
sets the wrong incentives," a Bundesbank spokesman told Reuters.
The Bundesbank saw the possibility of the EFSF bailout
buying government bonds "as less problematic", the spokesman
German Finance Minister Wolfgang Schaeuble said he welcomed
Draghi's pledge and Berlin said it stood ready, just like the
ECB, to do all in its power to ensure the survival of the euro.
"The president of the ECB said the ECB will do all that is
necessary to maintain the euro and the German government will do
all that is politically required to maintain the euro,"
government spokesman Georg Streiter told a news briefing.
"The ECB makes its contribution and the German government
makes its contribution," Streiter added, though the government
reiterated its opposition to granting a banking licence to the
euro zone's bailout funds.
In Paris, French Finance Minister Pierre Moscovici kept up
pressure on the ECB to act.
"I trust Mr. Draghi to do exactly what is needed, that is to
act so that markets are appeased and there can be a relaxation
of the interest rates for Spain, for Italy," Moscovici told
France 2 television.
French President Francois Hollande and German Chancellor
Angela Merkel will speak on the telephone later in the day to
discuss the implementation of decisions made at an end-June
European Union Summit, a French source said.
The French, Italian and Spanish governments are pushing for
the decisions made in Brussels to be implemented swiftly in
order to speed up help for Italy and Spain, where borrowing
costs have soared in recent days.
ECB policymaker Ewald Nowotny broke ranks with his
colleagues on Wednesday by saying he saw merits to boosting the
firepower of Europe's permanent bailout fund, the ESM, by
granting it a banking licence so that it could tap ECB funds.
But the idea appears to have little support among other ECB
policymakers and the Bundesbank also said it would be against EU
"A banking licence for the bailout fund would factually mean
state financing via the printing press and would be a fatal
route, which therefore is prohibited by the EU treaty," a
Bundesbank spokesman said, narrowing the ECB's policy options.
Highlighting the level of concern about the intensification
of the crisis, euro candidate country Latvia said the bloc
should expel near-bankrupt Greece as soon as possible as the
country is dragging on the region's recovery.
"It must be understood that one cannot entertain illusions
that one can keep Greece in the euro zone," Finance Minister
Andris Vilks told Latvian public radio, adding that European
efforts to deal with the crisis were far too slow.