Investors piled into peripheral eurozone debt on Tuesday ahead of the European Central Bank’s widely expected launch of large-scale bond purchases even as political resentment mounted over German attempts to water down the programme.
Spain made one of its largest ever bond sales at a record low rate, drawing investor orders of close to €23bn from around the world. Last year, Spain paid close to 4 per cent to borrow money for 10 years: on Tuesday it paid just 1.66 per cent.
Expectations that Mario Draghi, the ECB president, will on Thursday launch a programme of quantitative easing have driven up demand for government bonds in the eurozone, pushing yields down to historic lows, and countries in the periphery have moved to take advantage by locking in the low rates.
The timing of the Spanish sale and the strength of demand were remarkable, said Philip Brown, head of sovereign capital markets at Citigroup, one of the banks involved. “Investors are expecting that the ECB’s announcement will be positive for debt issued by peripheral eurozone countries,” he said.
As investors cheer, politicians and bankers across Europe are expressing mounting frustration over a key concession the ECB is set to make to mollify German opposition.
The expected announcement by Mr Draghi, will bring the bank closer into line with the US Federal Reserve and the Bank of England which adopted QE in the wake of the global financial crisis. But QE has split the central bank’s 25-strong governing council, with both German members voicing their opposition in recent weeks.
To appease QE’s German opponents, which include the chancellor Angela Merkel herself, Mr Draghi is expected to say that bonds bought will remain with national central banks, so losses will not be spread among eurozone members.
But other eurozone countries, as well as the International Monetary Fund, fear the concession could reduce QE’s effectiveness.
Athanasios Orphanides, a former member of the ECB’s governing council, said it potentially broke EU rules.
“It is as if it’s accepted that the euro area’s modus operandi is to clear things with Germany, and for the ECB to constrain its actions to what is best for Germany,” he told the Financial Times. “This is inconsistent with and violates the [EU] treaty.”
His criticism was echoed in Italy, whose finance ministry and central bank have in recent weeks warned against any move to water down QE.
“It’s good that the ECB is buying government debt but it would be a defeat for Draghi and a win for Merkel if the purchases were delegated to the central banks of each state,” said Il Mattinale, a daily newsletter published by centre-right lawmakers in Italy’s lower house of parliament. “It’s not a small matter, it’s a question of European solidarity,” it added.
Although some eurozone countries are critical of ECB concessions to Berlin, in Germany itself there is still strong opposition to the very idea of QE. Speaking in front of Mr Draghi and hundreds of other guests at a finance industry reception on Monday, Ms Merkel warned against using monetary policy to let governments in vulnerable economies off the hook over reforms.
She said: “One must prevent the dealings of the ECB from easing the pressure for improvements in competitiveness.”
While she was careful to avoid criticising the ECB directly at the event organised by the Deutsche Börse, the German stock exchange, Ms Merkel made no effort to deliver any public support to the central bank.
Mr Draghi has publicly defended the idea of QE. In an interview in the German press published last week, he said that to achieve the ECB’s medium-term inflation target of below but close to 2 per cent, the bank must “keep interest rates low and must work towards an expansionary monetary policy which accompanies growth”.
Yet the criticism of the design of the ECB’s programme from Mr Orphanides, a respected economist who was governor of Cyprus’s central bank until May 2012, was particularly pointed. His views carried extra weight at the ECB because he worked previously as a senior adviser to the US Federal Reserve.
“Changing the rules to avoid risk sharing absolutely damages the effectiveness of QE. It is not the best policy for the euro area as a whole and would not be promoting a single monetary policy,” said Mr Orphanides, an economics professor at Massachusetts Institute of Technology, where Mr Draghi completed his doctoral studies.
The EU treaty, he argued, banned preferential treatment for any one national central bank or government, while members of the ECB’s governing council were required to “make the best possible decisions for the euro area as a whole”.
In response, the ECB said it could not comment “on assumptions about future policy” ahead of Thursday’s meeting. “The ECB conducts monetary policy independently,” it added. “As it always has done, the ECB will continue to comply with EU law.”
Mr Orphanides’ criticism echoed comments from Michael Noonan, Irish finance minister, who said on Monday: “If monetary policy is going to be renationalised and national central banks are to become agents acting for Frankfurt, I think it [QE] will be ineffective.”
Leading the charge for abandoning risk-sharing has been Jens Weidmann, Bundesbank president and an outspoken QE critic. In December he argued that sovereign bond buying would break EU law unless national central banks shouldered the responsibility for losses. Privately, the government in Berlin supports Mr Weidmann’s position.