Sunday, 28 October 2012

Rajoy Faces Bailout Split With Monti at Madrid Meeting

By Ben Sills and Jonathan Stearns - Oct 29, 2012 4:01 AM GMT+0400
Italian Prime Minister Mario Monti and Spanish counterpart Mariano Rajoy may try to mask a growing divide over Europe’s new bailout strategy when they meet in Madrid today.
While both have jointly argued against extra budget austerity as the price for help from the European Central Bank, their interests diverge when it comes to whether they should ask for assistance together. A go-it-alone strategy by Spain would probably cut Italy’s borrowing costs while leaving Rajoy to weather the political flak of seeking emergency funds.
“Rajoy was probably pressed by Monti in August to accept a pre-emptive” bailout, said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “It would have made things so much smoother in Europe and for Italy as well. Rajoy is very much following his own route now.”
European officials are waiting for Spain to trigger a bailout plan unveiled by ECB President Mario Draghi last month and designed to draw a line under the region’s debt crisis. While Draghi’s plan to buy potentially unlimited quantities of government debt has soothed markets for now, a botched Spanish rescue could still trigger further turmoil.
Other potential sources of instability were highlighted at the weekend. In Italy, former premierSilvio Berlusconi cast doubt over the future of Monti’s government as he threatened to withdraw support for it. In Berlin, the finance ministry rejected a Spiegel magazine report that public creditors of Greece face losses. Meanwhile, Draghi stepped up efforts to soothe German concerns about bond purchases.

Jump First

Monti and Rajoy meet less than a week after Monti signaled that he would like Spain to jump first in asking for a full sovereign bailout.
“One country that still has an elevated spread and has problems with its banking system has hesitated and is hesitating about whether to activate the anti-spread mechanism,” Monti said on Oct. 23. “This country, as you know, is not Italy.”
For his part, Rajoy has fended off calls to seek a rescue for almost three months, saying he’s still assessing whether it’s in the national interest. He has already asked European partners for as much as 100 billion euros ($129 billion) to prop up banks hobbled by the collapse of the country’s real-estate bubble. The resulting recession has pushed the jobless rate to 25 percent.

Bailout Timing

With more than 200 billion euros of financing needed in 2013, Rajoy will probably request aid by the end of the year, says Tullia Bucco, an economist at UniCredit SpA in Milan. Blackrock Inc. Chairman Larry Fink said on Oct. 26 he expects Rajoy will cave in this week.
Spain’s benchmark 10-year bond yield has fallen more than 100 basis points since its peak of 7.75 percent in August, just before Draghi vowed to do whatever it takes to save the euro. Even with the gain, the yield of 5.61 percent exceeds the 4.48 percent average over the past decade. Italy’s 10-year bond yield is at 4.89 percent.
As Spain debates whether to ask for a bailout, officials are still struggling to find a solution for Greece, the epicentre of Europe’s crisis. In the fifth year of recession, Greece is trying to agree on the extra budget cuts needed to qualify for more aid under a rescue that has included the biggest write-off of privately held debt.

Conference Call

Euro region finance ministers will hold a conference call on Greece on Oct. 31 and Spiegel reported yesterday that representatives of international creditors recommended that they take losses.
Imposing a further writeoff on Greek creditors would be “a bit unrealistic,” Finance Minister Wolfgang Schaeuble told German radio Deutschlandfunk on Oct. 28.
International Monetary Fund Managing Director Christine Lagarde will meet with French President Francois Hollande today and German Chancellor Angela Merkel tomorrow. The IMF is part of the so-called troika of international creditors, along with the ECB and the European Commission.
German officials are trying to damp down the prospect of more money for Greece as voters question the wisdom of the latest drive to end the crisis. Draghi, who visited Germany’s parliament last week to defend his bond-purchase plan, used an interview with Spiegel magazine to follow up that diplomatic initiative.

‘Not Uncontrolled’

“Unlimited does not mean uncontrolled,” he said in an interview with Spiegel released yesterday. “We will only buy bonds from those countries that accept strict conditions, and we will check very carefully whether those conditions are adhered to.”
Telling the magazine “we take the worries of the people very seriously,” Draghi also said he saw no current risk to price stability and underscored the prospect of profits for German taxpayers from ECB purchases of debt.
Monti faces his own difficulties as he prepares to confer with Rajoy. The political ground below him has begun to shake as a result of his predecessor’s objections to the impact of austerity on Italy’s economy.
One day after being found guilty of tax fraud, Berlusconi said on Oct. 27 that his People of Liberty party must “decide whether to immediately withdraw our support of the government.” His party is the biggest in Italy’s parliament and one of two backing Monti’s almost year-old administration.

‘Brinkmanship Game’

Such a step would probably force Italian President Giorgio Napolitano to call early elections. It could also fan Europe’s debt crisis because Monti’s fiscal policies have contributed to a decline in Italy’s bond yields, with markets more focused on Spain in recent months.
“Although Berlusconi’s threat to end his support for Monti’s cabinet is part of an elaborate game of brinkmanship, it will refocus attention on Italy’s domestic woes,” Nicholas Spiro of Spiro Sovereign Strategy in London said in an e-mailed note. “The ‘Draghi effect’ has been breeding complacency on the part of investors, euro-zone policymakers and national politicians.”
To contact the reporters on this story: Ben Sills in Madrid at; Jonathan Stearns in Brussels at
To contact the editor responsible for this story: James Hertling at

UBS, RBS Traders Suspended as Rates Probe Goes Beyond Libor

By Liam Vaughan and Sanat Vallikappen - Oct 29, 2012 5:07 AM GMT+0400
UBS AG and Royal Bank of Scotland Group Plc suspended more than three traders in Singapore as regulators investigating Libor-rigging turn their attention to the rates used to set prices on foreign exchange derivatives.
At least two foreign-exchange traders at UBS, Switzerland’s largest bank, have been put on leave as part of an internal probe into the manipulation of non-deliverable forwards, a derivative traders use to speculate on the movement of currencies that are subject to domestic foreign exchange restrictions, according to a person with direct knowledge of the operation. Edinburgh-based RBS also put Ken Choy, a director in its emerging markets foreign exchange trading unit, on leave, a person briefed on the matter said on Oct. 26.
UBS, RBS Traders Suspended as Rates Probe Extends Beyond Libor
Visitors are seen at the reception desk of the offices of the Royal Bank of Scotland Group Plc ( RBS), in Singapore. photographer: Munshi Ahmed/Bloomberg
Regulators around the world are broadening the scope of their investigations beyond interbank offered rates such as the London interbank offered rate to encompass more benchmarks. The Monetary Authority of Singapore last month announced it was extending its probe into rate-rigging to include NDFs. About $1.02 trillion of the contracts are traded in a year, according to 2003 figures, the most recent available, compiled by the Emerging Markets Traders Association.
Spokesmen for UBS and RBS declined to comment. Choy didn’t answer a call to his work phone in Singapore today.
Unlike foreign exchange forward contracts, where two parties agree to physically exchange currencies at a set rate at a specific date in the future, NDF traders settle the net position in U.S. dollars. Who pays and how much at the end of the contract is determined by reference to a fixing rate which in some jurisdictions is set, like Libor, by a survey of banks.

Ringgit, Rupiah

Contracts that reference the Malaysian ringgit and the Indonesian rupiah against the dollar are among NDFs that are traded in Singapore. The spot rates for both currencies are fixed by the Association of Banks in Singapore based on data submitted by banks. If traders can move the spot rates, they could boost their profit, said a person familiar with the process who asked not to be identified.
The Russian ruble spot rate is set by CME Group Inc., which operates the Chicago Mercantile Exchange. Each day, the company surveys at least 15 lenders at a randomly selected time between noon and 12.30 p.m. in Moscow and asks them for both a bid and offer price on a hypothetical $100,000 ruble-to-dollar transaction.

Changed Methodology

In other jurisdictions, the rate is set by central bankers. The Reserve Bank of India sets the spot rates for dollar-rupee and euro-rupee by polling “a select list of contributing banks” at a “randomly chosen five minute window” between 11.45 a.m. and 12.15 p.m. each day, according to its website. Before it changed the methodology in June 2011, all banks were called at noon each day.
Barclays Plc, Britain’s second-biggest lender by assets, was fined a record 290 million pounds ($467 million) in June when it became the first bank to settle with regulators over the rigging of interest rates. Derivatives traders at the bank systematically sought to influence where Libor was set each day to suit their trading positions and boost profits, according to the U.K.’s Financial Services Authority.
To contact the reporters on this story: Liam Vaughan in London at; Sanat Vallikappen in Singapore at
To contact the editors responsible for this story: Edward Evans at; Chitra Somayaji at

Asian Stocks Fluctuate on Profit; Hurricane Closes NYSE

By Adam Haigh - Oct 29, 2012 8:14 AM GMT+0400

Asian stocks swung between gains and losses after mixed earnings at companies from Honda Motor Co. to Sumitomo Mitsui Financial Group Inc. and LG Display Co. Hong Kong developers slid on a new real-estate tax.
Trading volumes were below average across the region as the U.S. financial regulator canceled all stock trading as a precaution to protect workers as Hurricane Sandy barrels toward New York City. The MSCI Asia Pacific Index (MXAP) declined 0.1 percent to 121.41 as of 1:11 p.m. inTokyo, having earlier gained as much as 0.3 percent.
Asian Stocks Drop on Earnings; NYSE to Close as Hurricane Nears
Visitors look at the trading floor of the Tokyo Stock Exchange in Tokyo. The MSCI Asia Pacific Index declined 0.2 percent to 121.33 as of 12:49 p.m. in Tokyo, having earlier gained as much as 0.3 percent. Photographer: Tomohiro Ohsumi/Bloomberg
Honda, Japan’s third-largest carmaker, tumbled 3.9 percent after cutting its full-year profit forecast. Sumitomo Mitsui Financial (8316), Japan’s second-biggest lender by market value, advanced 1.3 percent after saying earnings probably beat its forecast. LG Display climbed 7.6 percent in Seoul after posting its first profit in more than a year. New World Development Co. led Hong Kong’s real-estate companies lower, dropping 7 percent, on a new property tax targeting overseas buyers.
Hong Kong authorities “are trying to slow speculative activity in the property market, though I don’t think they are telling people not to buy properties,” said Khiem Do, Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management (Asia) Ltd., which oversees about $8 billion. “Earnings have been downgraded quite a lot over the past few months, but I think they hit the level where perhaps the downgrades have stabilized.”

Nikkei, Kospi

The Nikkei 225 Stock Average lost 0.1 percent, reversing an earlier advance. Australia’s S&P/ASX 200 Index gained 0.5 percent and South Korea’s Kopsi Index added 0.2 percent.
The Shanghai Composite Index slid 0.1 percent and Hong Kong’s Hang Seng Index declined 0.2 percent.
Futures on the Standard & Poor’s 500 Index fell 0.3 percent. The last time the NYSE cut trading hours for weather was Jan. 8, 1996, when a blizzard dropped more than 20 inches of snow onNew York City.
The canceling of U.S. equity trading on all markets today, announced by the Securities and Exchange Commission and exchanges, followed an earlier decision by the New York Stock Exchange to close floor trading. Risks posed by the storm, expected to come ashore early Oct. 30 in southern New Jersey, were deemed too great to require workers to travel.
“You’ll expect to see limited volumes over Monday and potentially Tuesday,” said Steve Goldman, managing director at Kapstream Capital in Sydney. “The storm, depending on how bad it is, could take markets down. I grew up on the east coast and still have a house there. This one seems to be bigger than ones we’ve ever seen in the past, so there is some big downside risk if the storm turns out to be one of the biggest in U.S. history like they are predicting today.”
Trading volume on the Nikkei 225 was 21 percent below its 30-day average for the time of day, according to data compiled by Bloomberg. Shares changing hands on Australia’s S&P/ASX 200 were 41 percent below average, the data show.
To contact the reporter on this story: Adam Haigh in Sydney at
To contact the editor responsible for this story: Nick Gentle at

Emerging Stocks Drop to Month Low as Korean Economy Growth Slows

By Anuchit Nguyen and Stephen Gunnion - Oct 27, 2012 2:07 AM GMT+0400

Emerging-market stocks slid to a one-month low after South Korea’s economic growth slowed to the least since 2009 and earnings from China Unicom (Hong Kong) Ltd. to Kia Motors Corp. (000270) trailed analysts’ estimates.
The MSCI Emerging Markets Index (MXEF) dropped 0.8 percent to 990.70 in New York, the weakest close since Sept. 26. The gauge lost 1.5 percent this week, the most since the end of August. Information technology and financial stocks led today’s slide, and Samsung Engineering Co. was the biggest decliner after reporting that third-quarter operating profit fell. China Unicom sank after reporting net income for the same quarter that missed analysts’ forecasts. Banco Santander Brasil SA fell to an 11- month low.

South Korea’s gross domestic product expanded 1.6 percent in the three months through September from a year earlier, the slowest pace in three years and below the median economist estimate of 1.7 percent. More than 58 percent of companies in the MSCI Index that reported quarterly earnings this month have trailed analysts’ estimates, according to data compiled by Bloomberg, as the European debt crisis saps global demand.
“Markets are vulnerable to any negative news flow at the moment and some corporate earnings haven’t been great,” Michelle Pingo-de Abreu, an analyst at Johannesburg-based Nedbank Capital, said by phone.

The iShares MSCI Emerging Markets Index exchange-traded fund slipped 0.7 percent to $41.21 in New York.

Fund Inflows

The MSCI emerging markets index has declined 26 percent from its all-time high on Oct. 29, 2007. The gauge was valued at 18 times reported earnings at the peak, a 10 percent premium versus the MSCI World Index (MXWO) of advanced-nation shares. The emerging measure now trades for 12.3 times profit, a 23 percent discount versus the developed-country index, according to data compiled by Bloomberg.
Emerging-market equity funds took in $2.6 billion in the week to Oct. 24, a seventh straight week of gains, Citigroup Inc.’s Markus Rosgen wrote in client note today, citing data from Cambridge, Massachusetts-based research firm EPFR Global.
China’s yuan rose to the strongest level in 19 years in Shanghai on speculation policy makers will allow more appreciation. The Russian ruble dropped to the weakest price since Oct. 23 versus the dollar.
Russia’s Micex Index fell 0.9 percent for a fourth day of losses. A 4.8 percent slump in investment company AFK Sistema led the decline.

Bovespa Slumps

Brazil’s Bovespa (IBOV) gauge dropped 1 percent, extending its second straight weekly loss to 2.8 percent. Polish, Hungarian and Czech stocks also slid.
China’s Shanghai Composite Index (SHCOMP) slipped 1.7 percent, the biggest drop in five weeks. South Korea’s Kospi index slumped 1.7 percent, the most in seven weeks. Taiwan’sTaiex Index (TWSE) lost 1.8 percent to a three-month low, while the BSE India Sensitive Index (SENSEX) fell 0.7 percent. Stock markets in IndonesiaMalaysia, the Philippines and Turkey are closed for public holidays.
Kia Motors lost 5.6 percent in Seoul, the largest decline since May 18. Net income in the third quarter rose 28 percent to 829.5 billion won ($756 million). That trailed the 974.6 billion won average of 28 analyst estimates compiled by Bloomberg.

China Unicom

Santander Brasil, the local unit of Spain’s biggest bank, retreated 2.8 percent after reporting lower-than-forecast third- quarter profit. The Sao Paulo-based bank’s net income attributable to shareholders was 1.46 billion reais ($720 million) in the third quarter, compared with a 1.52 billion-real average estimate of five analysts surveyed by Bloomberg.
China Unicom, the nation’s second-largest mobile-phone company, posted the biggest slump since April 2009 in Hong Kong and its American depositary receipts fell 3.3 percent in U.S. trading. Third-quarter net income for the Hong Kong-based company rose 27 percent to 2.02 billion yuan ($324 million). The result, derived from nine-month earnings reported by China Unicom, compares with the 2.21 billion-yuan median estimate in a Bloomberg survey of analysts.
“Investors have big concerns about the global economic slowdown,” Kasem Prunratanamala, head of research at CIMB Securities (Thailand) Co. in Bangkok, said by phone today. “Earnings of most large companies are a bit disappointing. The weak economy and consumption will continue to give companies a tough time.”

Lower Than Forecast

Samsung Electronics Co. (005930), the world’s biggest maker of TVs and mobile phones, dropped 2.7 percent after saying competition will intensify and Apple Inc. announced a lower-than expected earnings forecast. Samsung Engineering tumbled 7.6 percent after its profit drop spurred Hyundai Securities and KTB Securities to downgrade the stock.
The extra yield investors demand to own emerging-market debt over U.S. Treasuries jumped 10 basis points, or 0.10 percentage point, to 286 basis points, according to JPMorgan Chase & Co.’s EMBI Global Index.
To contact the reporters on this story: Anuchit Nguyen in Bangkok at; Stephen Gunnion in Johannesburg at
To contact the editors responsible for this story: Emma O’Brien at; Vernon Wessels at

U.S. Stocks Post Weekly Drop Amid Disappointing Earnings

By Inyoung Hwang - Oct 27, 2012 8:00 AM GMT+0400

U.S. stocks slumped for the week, with the Standard & Poor’s 500 Index heading toward its first monthly decline since May, as companies from 3M Co. (MMM) to DuPont Co. reported disappointing quarterly results and forecasts.
All 10 groups in the S&P 500 fell at least 0.8 percent for the week. DuPont tumbled 8.4 percent after saying it will eliminate about 1,500 jobs amid a smaller-than-estimated profit. 3M plunged 5.3 percent as it reduced its full-year projection. Monster Beverage Corp. (MNST) slid 14 percent after U.S. regulators confirmed reports that the company’s energy drinks were cited in five deaths. Yahoo! Inc. (YHOO) rose 6 percent after Chief Executive Officer Marissa Mayer outlined her turnaround strategy.
U.S. Stocks Post Weekly Drop Amid Disappointing Earnings Results
Yahoo! Inc. rose 6 percent after Chief Executive Officer Marissa Mayer outlined her turnaround strategy. Photographer: David Paul Morris/Bloomberg
The S&P 500 slid 1.5 percent to 1,411.94 for the week. The benchmark gauge for U.S. equities has retreated 2 percent in October, indicating it will end four straight months of gains. TheDow Jones Industrial Average lost 236.3 points, or 1.8 percent, to 13,107.21.
“Companies are reporting their third quarter, and relative to expectations, there have been weaker earnings and especially weaker sales,” Jason Benowitz, who helps manage $5 billion at Roosevelt Investment Group Inc. in New York, said in a telephone interview. “That’s reflective of the weak global economic environment, especially internationally.”
Of the 273 S&P 500 companies that have reported quarterly earnings results, about 59 percent missed analysts’ estimates for sales, according to data compiled by Bloomberg. Almost 72 percent topped projections for earnings, the data show. Concern about a worsening picture for corporate results has sent the S&P 500 down 3.7 percent from this year’s high on Sept. 14. The index is still up 12 percent in 2012.

Modest Growth

Equities fell as the Federal Reserve said the economy is still growing modestly and unemployment remains elevated as the central bank maintains $40 billion in monthly purchases of mortgage-backed securities. Outside the U.S., a survey showed a contraction in China’s manufacturing is easing and investors speculated the Bank of Japan will expand monetary stimulus next week.
Investors are also watching the U.S. presidential race. The latest Washington Post/ABC News tracking poll showed Republican Mitt Romney with 49 percent support among likely voters and President Barack Obama with 48 percent support, a result within the survey’s three percentage point margin of error.

Election Watch

“Active investors have pulled some chips off the table,” John De Clue, the Minneapolis-based global investment strategist at U.S. Bank Wealth Management, which oversees $113 billion, said by phone. “They’re in more of a wait-and-see mode on the election and what happens after the election.”
Investors sold shares of companies most tied to economic growth during the week. Raw-material producers fell the most out of 10 groups in the S&P 500, losing 2.8 percent. Energy stocks slumped 2.4 percent for the second-largest drop. The Morgan Stanley Cyclical Index (CYC), a gauge of 30 U.S. stocks, erased 1.1 percent.
An S&P index of 11 homebuilders slumped 3.7 percent after a disappointing report on pending home resales.
DuPont tumbled 8.4 percent to $45.18 for the biggest loss in the Dow. Chairman and Chief Executive Officer Ellen Kullman plans to save $450 million with the job cuts and other actions as a weak global economy challenges her 12 percent profit-growth target. The most valuable U.S. chemical maker also cut its forecast for the year on declining demand for paint pigment and solar cells.

Scotch Tape

3M plunged 5.3 percent, the most since November, to $88.03. The manufacturer of products including Scotch tape and dental braces reduced its full-year forecast as a recession in Europe and slowing Asia growth crimped sales, missing analysts’ third- quarter revenue predictions. Facing slowing demand, Chief Executive Officer Inge Thulin has raised prices and kept costs in check to boost profit.
Boeing Co. (BA) retreated 3.9 percent to $71.11. The planemaker said it expects challenges next year that include a tougher defense market and higher pension expense. The defense unit, which accounted for 40 percent of total sales last year, is bracing for cuts in Pentagon spending, according to the Chicago- based company. The projected $3.5 billion in pension expense next year will be about $1 billion more than this year’s.

Monster Beverage

Monster Beverage tumbled 14 percent to $45.86. The company’s energy drinks have been cited in the deaths of five people in the past year, according to incident reports that doctors and companies submit to the U.S. Food and Drug Administration. The FDA said the incidents are considered to be allegations, and no conclusion is drawn until an investigation is completed.
Goldman Sachs Group Inc. removed Monster Beverage from its conviction buy list and Citigroup Inc. said the argument for a takeover has “evaporated.”
Apple Inc. (AAPL) slid 1 percent to $604. The maker of iPads and iPhones forecast profit and sales that missed analysts’ predictions as Chief Executive Officer Tim Cook boosts spending to revamp the company’s line and get new products in stores by year-end holidays. Earlier in the week, Cook introduced a smaller, cheaper version of the iPad, designed to keep customers from buying low-cost tablets from competitors. Apple has soared 49 percent this year.
Procter & Gamble Co. (PG) climbed 1.3 percent to $69.44 for the second-biggest gain in the Dow. The largest consumer-products maker reported first-quarter adjusted earnings that topped analysts’ estimates as the Cincinnati-based company slowed market-share losses and reduced manufacturing costs.

Turnaround Strategy

Yahoo rose 6 percent to $16.79, the highest level since May 2011. The largest U.S. Web portal reported third-quarter earnings that exceeded the average analyst estimate by nine cents a share. Mayer outlined her turnaround strategy, emphasizing mobile technology and personalized services, on her first call with analysts since being named CEO in July.
Facebook Inc. (FB) surged 15 percent to $21.94. The biggest social networking site posted sales that topped analysts’ estimates, allaying concerns over its ability to make money from mobile ads. Chief Executive Officer Mark Zuckerberg is showing early success with the more than half-dozen services unveiled since March that are designed to help businesses woo social- network users on tablets and smartphones.
Gamco Investors Inc.’s Howard Ward said he is fully invested in equities and sees the S&P 500 surpassing 1,500 in the next year, helped by a recovery in consumer spending and housing. He said the benchmark gauge for U.S. stocks was due to decline and investors should focus on earnings estimates for 2013 rather than short-term retreats.
“You should not be reactive to these impulses in the market that can really be in the hands of the high-frequency traders,” Ward, chief investment officer of growth equities at Gamco in Rye, New York, said in an Oct. 24 television interview on “Bloomberg Surveillance” with Tom Keene. His firm oversees $36 billion. “Ignore it. There’s a lot of noise. There were a lot of occasions in the last year where we had big swings in the market on any given day, only to see the market rally the next day.”
To contact the reporter on this story: Inyoung Hwang in New York at
To contact the editor responsible for this story: Lynn Thomasson

Wednesday, 24 October 2012

Draghi Takes Pitch Into Lion’s Den as German Faith Wavers

By Jeff Black and Brian Parkin - Oct 24, 2012 11:49 AM GMT+0400
Mario Draghi is taking his sales pitch into the lion’s den.
Related video:

Draghi Takes Pitch Into Lion’s Den as German Faith in ECB Wavers
Mario Draghi, president of the European Central Bank attends a news conference at the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group in Tokyo, on Oct. 13, 2012. Photographer: Tomohiro Ohsumi/Bloomberg
Oct. 23 (Bloomberg) -- Thomas Mayer, an economic adviser to Deutsche Bank AG and author of "Europe's Unfinished Currency: The Political Economics of the Euro," talks about the outlook for the European debt crisis. Mayer speaks with Stephanie Ruhle and Scarlet Fu on Bloomberg Television's "Market Makers." (Source: Bloomberg)
Draghi Takes Pitch Into Lion’s Den as German Faith in ECB Wavers While the announcement of Mario Draghi’s yet-to-be-deployed bond-buying program has calmed financial markets, Germany’s revered Bundesbank has openly opposed the plan, fanning concerns among politicians and the public. Photographer: Tomohiro Ohsumi/Bloomberg
By appearing before a joint session of three committees of the German parliament in Berlin today, the European Central Bank president is seeking popular support in Europe’s largest economy for his plan to purchase government bonds to stem the debt crisis. While Draghi says his so-called Outright Monetary Transactions are required for price stability, some German policy makers say they are an affront to the monetary orthodoxy upon which the ECB was founded.
“Draghi is on a mission to smooth concern that OMT won’t send inflation skyrocketing or lumber German taxpayers with liabilities they can’t pay,” said Frank Schaeffler, finance spokesman for the Free Democrats, who are in coalition withChancellor Angela Merkel’s Christian Democrats. “Many lawmakers -- even if they don’t admit it -- have grown suspicious of the ECB and its head, once dubbed the most German of non-German central bankers.”
While the announcement of Draghi’s yet-to-be-deployed bond- buying program has calmed financial markets, Germany’s revered Bundesbank has openly opposed the plan, fanning concerns among politicians and the public. Some 42 percent of respondents to a Stern survey published Sept. 6 said they had little or no trust in the ECB president, compared with just 18 percent who judged him favorably.

Press Conference

Draghi will brief members of the Budget, Finance, and European Affairs committees plus any other “interested representatives” in a closed session from 1:45 p.m., according to a statement released by the parliament. A press conference on the roof terrace of the building is scheduled for 4 p.m., weather permitting.
The Stoxx Europe 600 Index (SXXP) was down 0.1 percent at 8:43 a.m. in London after slumping 1.7 percent yesterday. The euro dropped 0.2 percent to $1.2965.
European governments are working to draw a line under a crisis that is now entering its fourth year and has prompted five of the 17 euro-area countries to seek bailouts. Bailed-out nations should be in a position to finance themselves in the market again by the end of 2014, Klaus Regling, head of Europe’s permanent rescue fund, said in an interview yesterday.

German Criticism

Draghi’s crisis response is being criticized on both sides of the political fence in Germany, said Christian Schulz, an economist at Berenberg Bank in London.
“On the conservative side there is the belief that countries should be responsible for themselves and the ECB certainly shouldn’t be taking over the risk,” he said. “On the left they want a democratically legitimated instrument to end the crisis, not the ECB.”
The Bundesbank -- a bastion of stability for Germans after its iron grip on prices after World War II banished memories of 1920s hyperinflation -- has led opposition to Draghi’s bond- purchase plan. Its president, Jens Weidmann, says the program is tantamount to financing governments by printing money, which is prohibited by the ECB’s founding treaty.
German discontent with ECB measures intended to stem the spread of the debt crisis has festered since the bank’s first foray into bond markets in 2010. That program, which has since been terminated, prompted then-Bundesbank President Axel Weber and ECB chief economistJuergen Stark, a former Bundesbank vice president, to resign in protest.

Secondary Market

Draghi’s plan foresees that the ECB will only buy a government’s bonds on the secondary market after it has agreed to economic reform measures set out by euro-area finance ministers and the International Monetary Fund.
Even as the Bundesbank has been vociferous in its objection, Merkel has backed the plan and asserted that it isn’t outside the central bank’s mandate.
“If the OMT is implemented as strictly as has been agreed, then it is a good, stabilizing measure to flank our rescue mechanisms,” Michael Stuebgen, the Europe spokesman for Merkel’s party, said in an e-mailed response to questions. Still, there is a need for an “exchange of information” between the parliament and the ECB, he said.

ECB Independence

“My question to Mr. Draghi is to what extent he sees his independence threatened by the bond-buying program,” Norbert Barthle, budget spokesman for Merkel’s Christian Union bloc in parliament, told reporters yesterday. “He’s saying that he’ll only buy bonds that are under the rescue shield, but the rescue shields are decided by parliamentarians. That’s not entirely independent.”
Since the announcement of the plan, Draghi has attempted to win the support of the German public. Addressing a conference of business leaders on Sept. 25, he said he has “enormous respect for the Bundesbank.”
At the same time, he criticized what he called the Bundesbank’s “no-to-everything” stance, saying “the greatest risk to stability is not action, it’s inaction.”
“It’s very important for Draghi to be in constant communication with the Germans,” said Irwin Collier, Professor of Economics at the Free University in Berlin. “It’s very important to keep them onside, or at least ensure they’re not actively trying to cut him off at the knees.”
To contact the reporters on this story: Jeff Black in Frankfurt at; Brian Parkin in Berlin at
To contact the editor responsible for this story: Craig Stirling at