RPT-ECB rift spices up debate on bond buys, succession

(Repeats item filed Monday evening. Text unchanged)

* Trichet/Weber split could harm good work on bond programme

* Analysts question reason for Weber’s phase-out call

* But say also addressing key issue of inflation risk

By Christiaan Hetzner

FRANKFURT, Oct 18 (BestGrowthStock) – A rift between senior European
Central Bank policymakers over how to nurse the euro zone
economy back to health risks unnerving investors and could play
a role in determining who becomes the bank’s next boss, analysts
say.

ECB President Jean-Claude Trichet on Monday slapped down
policy hawk Axel Weber for saying last week that buying bonds
issued by euro zone periphery nations like Greece had not helped
calm debt market tensions and should be “phased out
permanently”. [ID:nLDE69B266] [ID:nSGE69G00A]

Weber’s intervention raised unwelcome questions over the
future direction of ECB policy, with some saying the man heavily
tipped to replace Trichet when the Frenchman steps down in
October now looked increasingly isolated within the ECB, while
others said he had enhanced his credentials as a guardian of
price stability.

“Weber’s motivation is entirely unclear to me. Were the ECB
to tell the markets today that it would stop buying euro zone
sovereign bonds, tomorrow that would be a near catastrophe,”
said Michael Rottmann, Head of Interest and Currency Strategy at
UniCredit.

“Spread volatility would increase enormously, if the
strongest and in times of stress only purchaser of periphery
sovereign debt were to leave the market.”

Confidence that the worst of the euro zone crisis may be
over has encouraged investors to wade back into the market,
bidding up prices in recent weeks for Greek, Irish, and
Portuguese sovereign bonds and effectively doing the ECB’s job
for it.

“On the surface, Weber doesn’t seem to be doing himself or
the Governing Council any favours, since it was ultimately the
Securities Market Programme (SMP) that halted a vicious downward
spiral in the euro earlier in the year,” wrote Stephen Gallo,
head of Market Analysis at Schneider Foreign Exchange.

But central banks need their hardliners “(to) provide
markets and households with clues that (they) … haven’t
completely `dropped the ball’ on being anchors of price
stability.

“We don’t chastise the BoE and Fed for Sentance and Hoenig,
so why should we chastise the ECB for Weber?”

CLOSING THE STABLE DOOR?

Some argue the debate has in any case lost its relevance,
given that the ECB spent precisely nothing to prop up demand
last week — for the first time since the 63.5 billion euro bond
buying programme began. [ID:nFLAILE6CT]

“Fund managers are reducing their short positions on the
periphery. It started with Greece in mid-September, then Ireland
began to perform once the bad news on its banking system became
public. We have seen some pretty heavy buying of Portugal’s debt
last week,” said ING interest rate strategist Padhraic Garvey.

But market confidence will be tested again on Tuesday when
Portugal’s leading opposition party, the centre-right Social
Democrats (PSD), meets to decide whether to back the
government’s austerity plans for 2011. [ID:nLDE69E11U]

At worst, any budget setback paired with open dissent in the
ECB could embolden investors to launch a speculative attack on
EU sovereign bond markets that could ruin the still fragile
confidence in Greek, Irish and Portuguese creditworthiness.

“You cannot rule that out. Whenever a central bank begins to
buy back sovereign debt, it always exposes itself to such a
flank,” said Barclays Capital economist Thorsten Polleit.

Whether Bundesbank head Weber’s vocal dissent harms his
chance of inheriting the monetary throne of the ECB in November
— as more and more analysts believe — is of secondary
importance, Polleit argues.

“More than anything, Weber is contributing constructively to
an issue that has not received enough attention: the presently
incalculable risks associated with the current global policy of
monetizing debt. He is sensitizing the public to a much-needed
debate that has fallen by the wayside.” he said.

PRAISE FOR DRAGHI?

Italian media jumped on praise for Italy from Trichet at the
weekend as a possible endorsement of the bank’s head Mario
Draghi, viewed as Weber’s main rival.

But one analyst said it would be unwise to read too much
into Trichet’s observation that the Bank of Italy had been
“vigilant in exerting surveillance” during the financial crisis.

“The timing of Trichet’s comments is not coincidental. He
wanted to make very clear that he is the one giving guidance to
investors,” said Martin van Vliet, senior economist at ING.

“To say though that he implicitly favours Draghi as
successor by making the comments in an interview with an Italian
newspaper would be going too far.”

Schneider Foreign Exchange’s Gallo said any focus on the ECB
succession debate would be to miss a crucial point, namely that
the Bundesbank’s inflation-fighting credentials offer perhaps
the greatest guarantee for the single currency.

“These principles — largely shunned in a world of easy
monetary policy and deflationary pressures — could ultimately
be the linchpin that provides further confidence in the euro
over the longer term,” he wrote in a note to clients.

(Additional reporting by Marc Jones and Sakari Suoninen;
Editing by John Stonestreet)

RPT-ECB rift spices up debate on bond buys, succession