Germany, the largest shareholder in the European Central Bank, sets conditions for aid for heavily indebted countries

Bundesbank President Joachim Nagel speaks at a press conference after the G7 summit in Koenigswinter, near Bonn, Germany, May 20, 2022. REUTERS/Benjamin Westhoff/File Photo

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  • Nagel warns against trying to adjust price differences
  • He sets the conditions for his consent to any assistance
  • The head of the Bundesbank objected to the decision on June 15
  • Bundesbank is the largest shareholder in the European Central Bank

FRANKFURT (Reuters) – Germany’s central bank, the European Central Bank’s largest shareholder, set its conditions for providing new support to the euro zone’s most indebted nations on Monday after opposing such aid at an emergency meeting last month.

European Central Bank policy makers pledged to buy more bonds from heavily indebted countries such as Italy at an emergency meeting on June 15 to contain the growing spread between borrowing costs and Germany as the central bank prepares to raise interest rates. Read more

But Nagel, who disagreed with that decision according to sources at the meeting, cautioned on Monday against trying to determine the correct market spread as that is “virtually impossible” and risks making governments complacent.

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“I would therefore caution against using monetary policy tools to reduce the risk premium, as it is virtually impossible to ascertain whether or not the extended spread is fundamentally justified,” Nagel said in a letter.

Speaking shortly after Nagel, ECB Vice President Luis de Guindos said it was crucial to prevent financial fragmentation among the 19-nation eurozone if the ECB was to raise interest rates and fight high inflation – a hot topic in Germany.

It was the first apparent disagreement between Nagel and the European Central Bank headed by Christine Lagarde since the former took office in January and tried to end years of conflict between the two institutions.

The European Central Bank is trying to lower the spreads by using bond yields due in Germany and other northern European countries to buy more Italian, Greek, Spanish and Portuguese debt. It is also working on a new instrument to buy more southern European bonds with new money.

This will likely leave Germany less than its share of ECB bond holdings, as peripheral bond purchases are unlikely to match larger purchases of underlying paper in the future, the sources said.

exceptional circumstances

Nagel set his terms to support a new anti-proliferation plan.

He said that such assistance should only come in exceptional and well-defined conditions – most likely in reference to countries that are fiscally prudent.

Nagel added that it should not hinder the ECB’s efforts to reduce inflation or relieve pressure on governments to conduct sound budgetary policies.

“Unusual monetary policy measures against retail can only be justified in exceptional cases and under narrow circumstances,” Nagel said.

Sources told Reuters the new tool to buy more southern European bonds is likely to come with restrictions, such as that the country’s debt is deemed sustainable by the European Central Bank or that it adheres to the European Commission’s financial rules and economic recommendations.

In another potential concession for Germany, the sources said, the European Central Bank is likely to drain cash through “liquidity sucking” auctions, rather than direct bond sales that could cause central banks like the Bundesbank to sell record losses.


ECB policy makers who have spoken since the June 15 meeting, including Belgium’s Pierre Wonche and Holland’s Klaas Knott, two of the main political hawks, have endorsed Lagarde’s pledge to fight fragmentation.

This means that Nagel’s opposition is unlikely to prove an insurmountable obstacle.

But it would be a setback for two institutions trying to co-exist after a decade of feuds under Nagel and Lagarde’s predecessors – Jens Weidmann and Mario Draghi.

Lagarde has given national central bank chiefs a greater say in policy meetings and Nagel has so far refrained from publicly criticizing the decisions. Read more

But Nagel has come under pressure at home about the highest inflation since the 1970s and the perception that European Central Bank policy is designed to support debt-laden countries like Italy and Greece rather than keep prices in check.

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Editing by William McClain

Our Standards: Thomson Reuters Trust Principles.

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