Legal doubts over Europe’s bond buying

Julian Harris
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GERMAN president Christian Wulff blasted the European Central Bank’s mass acquisition of government debt as “legally questionable” yesterday.

Wulff cited an article in the European Union’s fundamental treaty, which prohibits the ECB from buying bonds directly from governments.

“This ban only makes sense if those responsible don’t circumvent it with comprehensive purchases on the secondary market,” he added.

On a fiery day in the Eurozone’s biggest economy, German chancellor Angela Merkel – fresh from being named the world’s most powerful woman – reasserted her objection to euro bonds. “It is politically irresponsible to succumb to the longings for a quick fix,” Merkel said.

“If the euro were to fail, the entire European project would be at risk,” she warned, yet described euro bonds – which would spread the burden of troubled states’ debts across all member countries – as “not at a solution”.

Yields on Greek two-year bonds rose to their highest levels since the launch of the euro in 1999, to reach 44 per cent; five-year Greek credit default swaps jumped 106 bps to 2,200 bps.

Furthermore, the ECB revealed yesterday that lending to banks shot up to €2.8bn on Tuesday, a two week high.

Germany’s economy had been dealt another knock earlier, with the Ifo business confidence index showing its steepest drop this month since soon after the Lehman Brothers collapse.

The index fell to 108.7 in August from 112.9 in July. Business confidence also plummeted in neighbouring Belgium, falling at its quickest rate rate since December 2008.

The downbeat surveys are mirrored closer to home today, with Nationwide’s consumer confidence index sinking again. The index slipped from 51 in June to 49 in July, it said.

Official data from the Eurozone was also bearish, with industrial orders across the 17-nation single currency area dropping by 0.7 per cent in June.