ECB's Weber Cautions Bond Purchases Pose "Significant" Risks; Credit Default Swaps Plunge After EU Goes "All In"

While Trichet says "On bond purchases we had an overwhelming majority", ECB council member Axel Weber was not one of the more willing participants.

Please consider Weber Says Bond Purchases Pose ‘Significant’ Risks

European Central Bank council member Axel Weber said the bank’s purchase of government bonds poses “significant” risks, Germany’s Boersen-Zeitung reported.

“It’s now about keeping these risks as minimal as possible,” Weber told the newspaper, adding that he’s “critical” towards the asset-purchase program. “That’s why these purchases will be limited.”

Weber also said that he considers the region’s rescue package to counter a sovereign debt crisis “suitable.”

Purchases Start Already

The ECB was quick on the trigger today to jump into government debt buying. Bundesbank confirms Euro zone central banks buying govt bonds

"We confirm this," a Bundesbank spokesman said.

The Bank of Finland said earlier that all euro zone central banks would take part in the bond buying plan, a key part of the $1 trillion package aimed at resolving the euro zone debt crisis.

EU Goes All In

Bloomberg Reports Default Swaps Tumble After EU Goes ‘All In’

Credit markets rallied around the world after the European Union agreed on an aid package worth almost $1 trillion to halt the sovereign debt crisis.

“There has been a poker game going on between the markets and the EU,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “This is probably reaching a climax as the EU has just gone ‘all in.’”

Credit-default swaps on the Markit iTraxx Europe Index of 125 investment-grade companies tumbled 32 basis points to a mid-price of 101 as of 4:46 p.m. in London, with banks leading the biggest ever one-day decline, according to Markit Group Ltd. Swaps on Greece fell 358.5 basis points to 557, Portugal dropped 178 to 247 and Spain declined 82.5 to 156 basis points, according to CMA DataVision. Contracts on France, Germany and the U.K. also fell.

The Markit iTraxx Financial Index of credit-default swaps on 25 European banks and insurers fell 42 basis points to 135 basis points and earlier dropped to 119, the biggest one-day drop ever, JPMorgan prices show. That’s still only the lowest in a week and is higher than the 87 basis-point level on April 13.

“Credit investors should not overlook that this is more of a sovereign bailout rather than a private-sector bailout,” Philip Gisdakis, the head of credit strategy at UniCredit SpA in Munich, wrote in a note to investors. “The austerity measures that will be part of the program will have a negative impact on corporate spreads.”

Given that there was an "overwhelming majority" in favor of government bond purchases (please see Bond Purchases Not Supported By Whole Council for details), pray tell, how can anyone believe Weber's comment: "That’s why these purchases will be limited"?

Addendum:
Weber Concerned About Inflation, Promises Vigilance

It is very difficult to keep up with the news these past few days. More details about Weber's dissent came out in this update Weber Says ECB Bond Purchases Pose Significant Risks

European Central Bank council member Axel Weber said the bank’s decision to buy government bonds poses “significant” risks.

“The purchase of government bonds poses significant stability risks and that’s why I’m critical toward this part of the ECB council’s decision, even in this extraordinary situation,” Weber told Boersen-Zeitung in an interview. The Bundesbank, which he heads, confirmed the remarks. “It’s now critical to keep these risks as minimal as possible.”

Weber said the bond purchases, which started today, are targeted at restoring market functioning and the monetary- policy transmission process. He said last week that the threat of contagion from Greece didn’t merit “using every means.”

While the ECB said it will “sterilize” the asset purchases by reabsorbing elsewhere the extra liquidity they inject into the economy, Weber indicated he’s concerned the program could fuel inflation risks.

“We’re determined not to undermine the current monetary- policy stance through the purchases,” he said. “The German population can count on us being especially vigilant in this respect. The Bundesbank and the entire Eurosystem stand for price stability in the monetary union -- up to now and also in the future.”

In case Weber did not notice, the German population wanted no part of this bailout.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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