Weber Says Optimism on Containing Euro Crisis Premature as ECB Buys Bonds

by Jeff Black and Christian Vits - Jan 12, 2011 6:15 PM GMT+0800

European Central Bank council member Axel Weber said it’s too soon to assume Europe’s debt crisis has been contained as the ECB steps up its purchases of government bonds to ease market tensions.

“The optimism of some observers seems premature to me,” Weber, who heads Germany’s Bundesbank, said in a speech in Frankfurt late yesterday. “There are several good reasons to look into 2011 with cautious optimism, not least the economic outlook. At the same time there remain -- also in Germany -- important challenges in terms of cleaning up the financial system and getting state finances in order.”

German government bonds declined today before Portuguese debt sales that may signal whether the nation will be able to avoid seeking a rescue package. European Union officials are trying to forge a “comprehensive” plan to address the region’s debt crisis, EU Economic and Monetary Affairs Commissioner Olli Rehn wrote in the Financial Times.

“The outlook for 2011 depends on the extent to which the right lessons are drawn from the crisis,” Weber said. “The responsibility for the debt crisis in the euro area lies primarily with fiscal policy, not with the financial markets. The affected countries must themselves restore the confidence that’s been lost.”

Budget Measures

That requires ongoing budget consolidation and a reduction in debt levels, Weber said. Portugalis raising taxes and cutting wages as it tries to convince investors it can narrow its budget gap further.

The ECB purchased Portuguese debt yesterday, said two traders with knowledge of the transactions, who asked not to be identified because the deals are confidential. A spokesman for the central bank declined to comment. Portugal plans to sell as much as 1.25 billion euros of 2014 and 2020 bonds today.

The 10-year bund had its first back-to-back losses since Dec. 27 today as gains in European stocks sapped demand for the safety of fixed-income assets before Portugal’s debt sale. The yield on the 10-year bund rose 3 basis points to 2.958 as of 10:01 a.m. in London.

ECB policy makers meet in Frankfurt tomorrow. The bank has bought 74 billion euros of government bonds so far. Weber has opposed the purchases, arguing they pose “stability risks.”

While euro-area countries are “on the right track,” Weber called for a tougher implementation of European Union budget rules than what has been proposed, including more automatic sanctions.

Violation Penalties

EU governments led by France and Germany said in October that penalties against budget violators should be left in political hands. European Parliament members yesterday endorsed the ECB’s position by proposing more automatism in penalizing deficit breaches.

Weber was more positive about the economic outlook in Germany, the region’s largest economy, saying domestic demand may play an increasingly important role in its recovery.

The Bundesbank estimates Germany’s economy grew 3.6 percent in 2010, the most since reunification two decades ago, as foreign demand for exports fuelled hiring. The Federal Statistics Office in Wiesbaden issued 2010 gross domestic product data today, confirming that estimate.

“Surprisingly robust private consumption may continue to be strengthened by the advantageous labor-market situation,” Weber said. “Germany will continue to lead the recovery in the euro area.”

To contact the reporters on this story: Christian Vits in Frankfurt cvits@bloomberg.net; Jeff Black in Frankfurt jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net