Taxpayers across the European Union might be forced to bail out the European Central Bank (ECB) if that body proceeds with its plans to buy Spanish and Italian government bonds, Andrew Brons MEP has warned.
Speaking during a European Parliamentary debate on the economic crisis in the eurozone, Mr Brons said that a common interest rate “cannot be appropriate for economies in very different states of health.
“Interest rates are too high for Southern European countries that are in recession, because they have been raised to curb inflationary pressures in Germany,” Mr Brons said.
“This has exacerbated the recession, which has led to falling government revenues and increased government debt.
“Furthermore, the percentage return (or ‘coupon’) on sovereign bonds has had to be higher because of diminished confidence and fear of default.
“The ECB was already buying small countries’ sovereign debt and has recently started to buy Spanish and Italian bonds to instil confidence.
“Whilst this might postpone any crisis, there is a real danger that the ECB will purchase bonds the market value of which will eventually fall, as has already occurred with bonds issued by Greece Ireland and Portugal.
“Even an institution as well funded as the ECB cannot survive a massive fall in the assets of its balance sheet, without a huge re-capitalisation by the taxpayers of the Euro-zone and possibly from outside the Euro-zone,” Mr Brons warned.
* On 12 September, the ECB announced that it had purchased €14 billion of Italian and Spanish government bonds during the previous week. The announcement provoked the resignation of the German representative on the ECB’s Executive Board, Jürgen Stark.
Mr Stark’s resignation was followed by a speech by German Bundesbank president Jens Weidmann who said that the ECB had “burdened itself with considerable risks” after buying the Italian and Spanish bonds.
So far, the ECB has purchased €143 billion worth of sovereign bonds from crisis-ridden countries, placing its shareholders at a huge risk should those nations default (which appears increasingly likely to happen).