Bundesbank Furious By ECB’s Overly Generous Loans

Bundesbank President Jens Weidmann has expressed concern over the European Central Bank’s lending policies, after the ECB issued another round of cheap funding to the region’s banks that took the total loan programme to beyond the trillion euro mark.

Bundesbank President Jens Weidmann has expressed concern over the European Central Bank’s lending policies, after the ECB issued another round of cheap funding to the region’s banks that took the total loan programme to beyond the trillion euro mark.

On Wednesday, the ECB’s second offering of unlimited low-interest loans were snapped up quickly by 800 banks, who borrowed a total of 529.5 billion euros ($712.4 billion). This followed a similar offering in December last year when 523 banks had borrowed 489 billion euros ($657.9 billion) from the region’s central bank.

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While the action was devised to lower borrowing costs of heavily indebted countries and inspire some form of confidence among investors, critics claim that the glut of loans was flooding the market with too much easy money and creating a level of dependency on the ECB from the region’s banks.

“The large amount of liquidity will, of course, have to be mopped up once financial markets have recovered, to avoid fuelling inflationary pressures,” said former ECB board member Lorenzo Bini Smaghi in a column for the Financial Times.

[quote]“Cheap three-year funding (also) creates a disincentive for eurozone commercial banks to restructure their balance sheets and strengthen their capital base,” added Smaghi, who warned that the banks could become “addicted to easy central bank financing.”[/quote]

In a letter written directly to ECB’s President Mario Draghi, as revealed by FT,  Weidmann also warned the central bank that they risked endangering their reputation as a credible lender, and called for a quick return to stricter rules for the collateral that the ECB receives in return for funds.

Last month, it was revealed that the Bundesbank was now 228 billion euros ($300.5 billion) in debt – after previously holding 270 billion euros in their reserves – from lending cash to other eurozone countries.

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Germany and the Bundesbank also endured heavy criticism during last week’s G-20 meeting, where international leaders had called for Germany to do more to assist Europe.

As such, Weidmann had to issue a strongly worded statement last Friday, in order to dispel rumours that Germany was only thinking about themselves.           

[quote]”Let me start by correcting a popular misconception… the mistaken view that Germany, while itself managing to dodge the flames of the current crisis, is now selfishly refusing to come to the aid of the stricken countries by acting as chief firefighter,” said Weidmann, as quoted by AFP.[/quote]

“Germany is acutely aware of the need to tackle the root causes and not just the symptoms of the crisis,” stressed Weidmann, adding that Germany was also bearing a “disproportionate” burden in rescuing the eurozone.

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Weidmann’s recent letter to the ECB also emphasised the growing concern in the country of the potential costs to its economy from its role as the eurozone’s biggest creditor nation.

“This is reaching the danger point. It (the debt) is already one and a half times the total budget of the German government,” said Professor Frank Westermann of Osnabrück University. “If any of the crisis countries exits the euro or if there is an EMU (Economic and Monetary Union of the European Union) break-up, the Bundesbank bears extreme risks.”