Germany rejects plan to give hand to Italy, Spain

BERLIN - Agence France-Presse

A container ship in the seaport of Hamburg, Germany. The gap between benchmark German bonds and the debt-wracked eurozone countries has been widening. EPA Photo

Germany yesterday poured cold water on a reported plan by the European Central Bank (ECB) to set a cap on the borrowing costs of debt-wracked eurozone countries, terming it “very problematic.”

“Purely theoretically and speaking in the abstract, such an instrument would of course be very problematic but I am not aware of any plans in this direction,” said Martin Kotthaus, a spokesman for Germany’s finance ministry.

“You know that we basically do not comment on the ECB, which is an independent institution, but I can still say that I do not know about these plans,” added Kotthaus in a regular government briefing.

Der Spiegel newsweekly reported a day earlier that the ECB was planning to set a limit on the borrowing costs of individual countries and intervene on the markets to maintain this level.

Spain and Italy have seen their borrowing costs shoot up during the eurozone crisis to levels that forced Greece, Portugal and Ireland to seek a bailout.

The so-called spread, or difference, between benchmark German bonds and the debt-wracked countries would be decisive for the proposed rate cap, Spiegel said.

ECB President Mario Draghi announced earlier in August that his institution “may” buy bonds of struggling countries if they first apply for EU bailout funds and accept tough conditions in return.
He said the details would be worked out before the next meeting of the ECB, scheduled for September 6.

Spiegel said that ECB governors would decide then whether to implement the proposed borrowing cost cap.

The ECB declined to comment on the report yesterday.

However, Germany’s central bank, the Bundesbank, reiterated its opposition to Draghi’s proposal to buy bonds in return for reforms.

The Bundesbank’s monthly report said the volume of bonds bought to drive down borrowing costs “could be unlimited and would in any event be sufficient to achieve the programme’s objectives.” “The Bundesbank remains of the opinion that, in particular, government bond purchases by the eurosystem should be viewed critically and entail, not least, substantial stability policy risks,” the bank said.

“It is the responsibility of fiscal policymakers -- the governments and parliaments of the euro area countries -- to decide whether to possibly considerably enlarge the communitization of solvency risks; such steps should not be taken via central bank balance sheets,” it added.

On government debt markets, the interest rate, or yield, on 10-year Spanish debt declined substantially in morning trading yesterday to 6.211 percent from 6.443 percent at the close on Aug. 17.