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Draghi tries to keep Germany aboard

Friday, August 31 09:17:19

A Bundesbank spokesman declined to comment today on a report in the mass circulation Bild newspaper that Weidmann, who has stressed his opposition to the strategy, had considered resigning several times in recent weeks but had been dissuaded by the German government. Draghi is skipping this weekend's Jackson Hole policymakers' retreat to try to forge agreement. The Italian will have little time to celebrate his 65th birthday on Monday as he tries to seal a deal before a Sept. 6 ECB policy meeting.

The ECB is preparing to ease painful borrowing costs in Spain and Italy, in the teeth of Bundesbank opposition, to buy the euro zone governments time to negotiate legal and political hurdles to a longer-term response to the euro zone crisis. "Opposition from Weidmann and reservations from some other Council members will mean that ECB bond purchases would be highly conditional, be focused on the short end and would not aim to bring yields down quite as much as Italy and Spain might like to see," said Berenberg economist Holger Schmieding.

Securing majority support for a plan Weidmann can live with represents the biggest balancing act Draghi has faced since he took over the ECB presidency on Nov. 1 last year. He has already said any new ECB intervention will be conditional on the country affected first seeking help from the euro zone's rescue funds and agreeing to the austerity-centred reforms tied to such aid.

But go too far in trying to calm the Bundesbank and Draghi risks ending up with a dud of a plan that has no impact on markets. Not go far enough and he risks more Bundesbank sniping. Draghi's allies are already talking tough. ECB policymaker Joerg Asmussen said late on Thursday the ECB should only buy sovereign bonds if the International Monetary Fund is involved in setting the economic reform programmes that should be a condition for intervention. The IMF is notorious for tying strict conditions to aid and Madrid is likely to take a dim view of that notion.

Spanish Prime Minister Mariano Rajoy has said he will not ask for any further help, to add to a bailout of Spanish banks worth up to 100 billion euros, until the ECB's strategy is clear. But with Spain's important northeastern region of Catalonia calling for government help this week and recession deepening, some form of outside assistance is increasingly likely.

Draghi's July 26 vow to do "whatever it takes" to save the euro heralded his signature plan. He must now deliver to put his stamp on the ECB and seal its shift away from the Bundesbank's stability model to a more pragmatic institution.

"It needs to be credible in the eyes of the markets," one ECB source said of the new programme, adding that policymakers were aiming to have it ready for their meeting next Thursday. The source, speaking on condition of anonymity, did not think the ECB would announce a target for bond yields, or aim for a specific spread - the premium other sovereigns' paper trades over the German benchmark.

Investors are ready to give the ECB some time to get on top of the crisis but any signs of a silver bullet being delayed beyond the bank's Oct. 4 meeting will have fingers hovering over the "sell" button on stocks, bonds and the euro. Markets soon found the ECB had little appetite to spend more than 20 billion euros a week on its existing bond-buy programme, the now mothballed Securities Markets Programme (SMP), when it extended that plan to buy Spanish and Italian debt a year ago.

The SMP, launched in May 2010, was hobbled from the outset by the Bundesbank's then president, Axel Weber, voicing his deep misgivings over the programme just as soon as it was born. Weber quit over the SMP in 2011. Weidmann indicated to Der Spiegel magazine at the weekend he planned to stay at his post. "I can do my task best if I stay in office. I want to work to ensure that the euro is just as hard as the mark was," Weidmann told Der Spiegel in an interview released on Sunday. ( C) Reuters