Bank Chiefs Back Draghi's Bond-Buying Plan

Matt Clinch, special to CNBC.com
Friday, 7 Sep 2012 | 9:18 AM ET

The European Central Bank's (ECB) bond buying program has been received with skepticism by the Bundesbank and the German press, but Chairmen of two major banks have come out to back Draghi's latest plan.

Italian president of European Central Bank (ECB) Mario Draghi arrives for a press conference in Frankfurt am Main, western Germany, on July 5, 2012.
Frederik Von Erichsen | AFP | Getty Images
Italian president of European Central Bank (ECB) Mario Draghi arrives for a press conference in Frankfurt am Main, western Germany, on July 5, 2012.

The strict conditionality that the ECB has put on its assistance has removed the “moral hazard” of such outright purchases, Peter Sutherland, Chairman of Goldman Sachs International told CNBC.

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Peter Sutherland, chairman of Goldman Sachs International, reacts to the ECB's new bond buying program, "The emphasis on conditionality puts the responsibility for the euro zone back on the shoulders of politicians."

Sutherland, the former EU Competition Commissioner says the conditions of the scheme put the responsibility squarely back on the shoulders of the politicians.

“What has been done by the ECB is a remarkable demonstration of resolve and an absolutely necessary decision in terms of stabilizing markets and creating the conditions under which governments now have to act,” he said Friday.

“This in my view is not a moral hazard issue which is opening up the floodgates, as some would put it in some of the core countries, to money flowing into the periphery. It is conditional and political action.”

At Thursday’s press conference the President of the ECB, Mario Draghi, said the "Monetary Outright Transactions" program would be sterilized, i.e. it would mop up the extra liquidity that was created by its actions, so as to prevent inflation.

Draghi said there would be strict conditionality and the ECB will only consider bond purchases if a country fully respects the program. If non-compliance occurs, the ECB could terminate or suspend the assistance.

Bundesbank President, Jens Weidmann, who has spoken out against bond-buying by central banks in the past, was the one dissenting voice at Thursday's meeting.

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Jakob Frenkel, chairman of JPMorgan Chase International, told CNBC, "Let's be serious. The arithmetic says that unless you are willing to cut entitlements you will not bring your fiscal house in order that is a reality of economics."

Speaking to German magazine Der Spiegel in August he likened it to a “drug” that governments would get hooked to.

Weidmann's views have been supported by the former Governor of the Polish Central Bank, Professor Leszek Balcerowicz, who warned last month that ECB bond purchases could create a moral hazard.

Speaking at an Open Europe event on August 29, Balcerowicz detailed what could be a “financial-fiscal crisis”, which could break out when excess cheap credit feeds economic bubbles, which would lead to worsening public debt and deficits.

“If you have a lot of money, then incentives to reform are weaker… many politicians prefer taking the easy money and putting off painful reforms,” he said.

But Jakob Frenkel, Chairman of JPMorgan Chase International, told CNBC, the conditions of the ECB’s new program meant euro zone governments would realize there is ”no such thing as a free lunch.”

Frenkel quoted William McChesney Martin, former Chairman of the U.S. Federal Reserve.

“The art of central banking is to take the punch bowl away before the party gets going,” he said.

“The question is when is the party getting too stormy?”

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