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ECB fights to avoid role in euro zone rescue fund

Sep 25, 2011, 4:01 p.m.
European Central Bank governor Jean-Claude Trichet adjusts his tie prior to a family photo taking session at an informal meeting of the Economic and Financial Affairs Council (ECOFIN) in Wroclaw September 16, 2011. REUTERS/Kacper Pempel

By Marc Jones

WASHINGTON (Reuters) - The European Central Bank battled to avoid being dragged further into the area of fiscal policy this weekend, as its policymakers stood firm against using the ECB to help supercharge the euro zone's rescue fund.

The 17-country euro zone wants to convince financial markets that its bailout fund is big enough to handle any future debt troubles, but without having to tap resistant governments for yet more taxpayer money.

Over the last few weeks, the plans have been gathering momentum. One of the ideas that has been floated is to give the fund the ability to borrow money from the ECB's currently unlimited lending operations, which it could then use to inject into troubled government bonds or banks.

There was widespread rejection of such a maneuver, however, by key ECB figures and Klaus Regling, head of the fund, known as the European Financial Stability Facility (EFSF).

"There are serious concerns about the compatibility with the ECB because it may not be in line with the prohibition of market financing, so I think it is very unlikely that you will see that," Regling told a panel discussion organized by the Euro50 group.

For the ECB, it is a case of not being dragged further beyond the central bank's core task of keeping inflation in check. The ECB is already deeply uncomfortable about buying government bonds, something it started doing last year, and there are fears its independence is being compromised.

"I think the whole idea of leveraging the EFSF is one of a variety of financial engineering innovations that have been put forward. Some of them are better than others, I'll leave it at that," Ireland's ECB Governing Council member Patrick Honohan told Reuters, when asked whether the ECB could be involved in bolstering the EFSF.

"I think there are many other opportunities and possibilities that are maybe higher on the list (than using the ECB)," he said.

ECB Executive Board member Juergen Stark and former ECB heavyweight Axel Weber also hit out at pushing the central bank beyond its remit.

"For monetary policy to remain effective, its responsibilities must remain within clear limits," Stark said in a speech.

"Opportunistic manipulations of the monetary policy framework of course damage the foundations on which that framework rests."

LIQUIDITY DELUGE

Stark's comments came just hours after U.S. Treasury Secretary Timothy Geithner bluntly told European governments to eliminate the threat of a catastrophic financial crisis by teaming up with the ECB to boost the bailout capacity.

The International Monetary Fund also applied pressure, saying it would support interest rate cuts. Antonio Borges, head of the fund's European department, urged the ECB to continue to buy bonds once the EFSF gets the power to do so, saying the ECB was the only player with the ability to scare market speculators.

Financial markets now expect the ECB to cut rates by 50 basis points back to a record low of 1 percent next month.

ECB President Jean-Claude Trichet warned at the IMF meeting that the euro zone was at the epicenter of a much bigger sovereign debt crisis and that risks to the stability of the financial system had risen considerably.

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