Debt crisis: central bank action is work of the devil, says Germany’s Jens Weidmann

The head of Germany’s Bundesbank has raised eyebrows across Europe after he appeared to compare Mario Draghi’s bond buying programme with the “devil’s work”.

Jens Weidmann said that efforts by central banks to pump money into the economy reminded him of the scene in Faust Photo: Reuters

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By , Chief Business Correspondent

5:56PM BST 18 Sep 2012

Jens Weidmann said that efforts by central banks to pump money into the economy reminded him of the scene in Faust, when the devil Mephistopheles, “disguised as a fool”, convinces an emperor to issue large amounts of paper money. In Goethe’s classic, the money printing solves the kingdom’s financial problems but the tale ends badly with rampant inflation.

Without specifically mentioning Mario Draghi’s bond-buying programme, he said: “If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” He added: “Yes, this temptation certainly exists, and many in monetary history have succumbed to it,” Mr Weidmann warned.

Although the remarks were in context – Frankfurt is currently marking the 180th anniversary of the death of Goethe – they defy calls by leaders for Mr Weidmann to tone down his criticism of the ECB, particularly at a febrile moment in the crisis. The launch by Mr Draghi of an unlimited bond-buying programme has boosted both confidence and markets.

Spanish and Italian borrowing costs dropped marginally on Tuesday. The yield on Spain’s benchmark 10-year bonds dropped to 5.8pc from 6pc earlier in the week; equivalent Italian debt hovered around 5pc.

But pressure continued to mount on Spain to officially request a bail-out from Brussels to stabilise its economy and the rest of the eurozone. In an interview, Soraya Saenz de Santamaria, Spain’s deputy prime minister, said Madrid was still considering the implications of help from Brussels. She added that Europe must recognise the sacrifices and reforms Spain is carrying out.

Bad loans held by Spanish banks climbed to a record high in July, with nearly 10pc of households and business in arrears on their loans. The Bank of Spain said the bad loan rate, which showed that €169.3bn of loans were more than three months overdue, was the highest since records began in 1962.

Spain managed to auction some short-term debt on Tuesday but experts said the markets would not tolerate the uncertainty for long. Economist Nicolas Spiro said: “The window of opportunity for Spain to issue debt at what are still relatively favourable yields appears to be closing. The markets have priced in an ECB-backed bond-buying programme for Spain. The longer Madrid dithers, the more likely it is that the markets will turn decisively against Spain.”

A survey showed that 57pc of Spaniards believed the country will need to be bailed-out by the eurozone.

Meanwhile in Greece, leaders continued to battle with efforts to reduce costs in its bid meet its austerity targets.

George Provopoulos, head of the Bank of Greece, told Mr Draghi that he had taken a 30pc pay cut, on top of a 20pc cut two years ago. “I am determined to continue this process of cost rationalisation at the Bank of Greece,” he said.

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