Is the Bundesbank really independent?
from Erwan Mahé (guest post)
Today I would like to briefly examine an issue that might seem to be a major point, but which cruelly exposes the current eurozone construction fault lines and which shows how much “image” can dissimulate reality.
In the last two years, we have seen many of our German friends express their dismay at the supposed adventurism of the ECB’s unorthodox measures, like the SMP and the easing of collateral eligibility for the second VLTRO. They have also denounced the supposed desire of certain governments to use the ECB as an instrument of fiscal policy by making it play a role incompatible with its restrictive mandate.
But yesterday we were treated to one more example of the saying, “do as I say and not as I do”, with the very mediocre results of the 10-year Bund auction in Germany when the Bundesbank again intervened to buy a portion of it in order to head of a big, fat flop! In effect, the German central bank bought €1.13 billion (22.60%) out of the €5 billion in Bunds put on sale! And that came after having served the entirety of non-competitive bids made by banks during the auction process, i.e., €2.257 billion or 55% of total demand. In reality, competitive bids, totalling €1.852 billion, represented just 37% of the total amount that the German government sought to raise. I don’t think I need to draw a picture of what would have happened if the Buba had not fulfilled its role as “protector” of the image of German debt.
But isn’t this modus operandi a little inconsistent with the budget discipline lectures regularly served up to us by this very same Bundesbank, the same ideological focus that led two of its top officials to resign from the ECB due to its so-called deviation from the aforementioned discipline?
Bear in mind that the such purchases of government debt on the primary market is strictly forbidden to the ECB, and, unless I am mistaken, to all other central banks on the eurozone. Ditto for the Fed.
For those who have the slightest doubt about the fiscal character of such Bundesbank operations, I have kept under my pillow for you a little excerpt from the GIC conference which I had the pleasure of attending three weeks ago: the speech by Mr Weber himself on this matter. His frankness just about knocked me off my chair!
Here is a transcription that I carried out myself, but I strong advise you to go directly to the source in the attached video (from 22nd to the 25th minute):
Excerpts (emphasis mine):
“Central banks fulfill a very core function for policy making by being focus on price stability. State financing on the other hand is not compatible with good monetary policy and we’ve seen that in the past.
Just to give you an example, when the German debt is issued on the market, the Bundesbank all over the years and still today, has a role in managing those debt issues. So if there is less subscription then is needed, in order to preserve pricing, the Bundesbank take this onto their portfolio, and then sells them in a more opportunistic way later on.
It’s a pure fiscal agent role; it has nothing to do with monetary policy. It is basically related to market marking in the German debt market. And somebody needs to do that, it does not have to be the Central Bank, but if it is the Central Bank it has to be clear: it is a fiscal agent role under the auspices of fiscal policy.”
Incredible but true!
However, don’t believe for a second that yesterday’s Bundesbank intervention was an exception. Not only does it intervene in all debt auctions, regardless of the maturity of the debt issued, but its 22.60% take-up is far from being a record! After a little digging, I was able to find the amounts involved in each of these operations. I then recalculated the percentage of the primary market debt bought by the Buba for own account.
From these figures, I have created a revealing little graph for you. In the graph, I have excluded interventions on 2-year issues, which are less significant, but it is worth noting that in June 2008 the Buba had to buy 40.5% of the Schatz amount issued that day. The record high for the Bund is 39.27% in November 2011 and for the Bobl it is 41.51% in 2003.
The Buba very present on primary market
This sort of intervention appears all the more surprising at a time when the Bundesbank seems to consider the ECB’s rates too low for the German economy.
As a bonus, I invite you to go back to the GIC video (link above) at 1h12 and listen to Bank of France Governor Mr Noyer answer questions about the measures to ease collateral eligibility for the second VLTRO. In response to the Bundesbank’s current criticisms of these measures, he defended the measures by recalling the reality of what occurred during the provisions losses booked following the Lehman Brothers bankruptcy:
“We all made a check to the Bundesbank.”