As the European Central Bank (ECB) mulls steps to end the euro zone debt crisis, analysts say what’s really key is that Germany fully supports the measures – otherwise the ECB’s credibility is likely to take a hit, sending markets back into a tailspin.
The importance of this, they argue, was highlighted by a weekend report by Germany’s Der Spiegel magazine that the ECB was looking into setting yield thresholds for any moves to buy the bonds of struggling euro zone countries.
The euro initially rallied on Monday after the report but soon gave up those gains after Germany’s central bank, the Bundesbank, repeated its opposition to bond purchases and the country’s finance ministry said it was not aware of any plans for the ECB to target bond spreads. The ECB also brushed aside the report, saying it was misleading to report on decisions that had not yet been taken.
Gary Dougan, Chief Investment Officer for Asia and the Middle East for Coutts, told CNBC that he believed the ECB should buy the bonds of troubled euro zone states but did not think that Germany, Europe’s largest economy, would support the move.
“I think it’s very crucial that Germany does back something, otherwise it won’t be credible in the markets’ eyes,” Dougan told CNBC Asia’s Squawk Box.
Sam Chandan, Chief Economist at Chandan Economics, agreed, adding that German opposition meant that any measures – such as the one raised in the Der Spiegel article – were unlikely to make much progress.
“The very swift response from Germany really speaks to how decisive it would be, although (German Chancellor Angela) Merkel has ceded some ground for broad measures, it is unlikely that this kind of program would go through,” Chandan told Squawk Box.
The Bundesbank has a significant influence within Germany and on financial markets because of its inflation-fighting credentials. And without tacit approval from Germany, analysts say the ECB would find it difficult to press ahead with measures to end Europe’s debt crisis.
Indeed, comments on Friday from Angela Merkel backing strong rhetoric from ECB President Mario Draghi last month underpinned positive sentiment in financial markets towards decisive action. The MSCI World Index, which tumbled 14 percent between late March and early June, has since recovered almost all of the losses – boosted in part by expectations for ECB action.
“The problem is that once they (the ECB) make any kind of commitment they have got to follow through, otherwise their credibility as an institution is at risk and a loss of that credibility would be far more damaging than anything we’ve seen so far in terms of their ability to contain the crisis,” Chandan said.
“It really all becomes contingent upon whether the Germans come on board,” he added.
Equity markets have rallied in recent weeks in anticipation that the ECB will take action such as buying the bondsof troubled euro zone states in some form and focus is now turning to key events in September.
Germany’s Constitutional Court is due to make a ruling on September 12 on the European Stability Mechanism bailout fund. This verdict is important for the fund to be functional and the ECB has said it wants countries to tap the fund before it buys their bonds.
Dougan at Coutts said that investors looking at the implications of the euro debt crisis should look beyond near-term events.
“I think this (the debt crisis) will roll on for the next 12 months, that’s why we’re telling investors: you may want to dip in and take profits but out there is a big, big problem which is not resolved yet,” Dougan said.
- By CNBC's Dhara Ranasinghe