European taxpayers should not be left accountable for the securities that form part of the European Central Bank's (ECB) new asset-purchase program, Jens Weidmann, the president of the Deutsche Bundesbank has told CNBC.
The central bank is about to embark on the purchase of asset-backed securities (ABS) in an attempt to boost the region's economy and boost inflation. This means euro zone banks would sell the ECB their loans and other types of credit that have been packaged together. The ECB has said that it would only purchase less risky "senior" tranches of securitized debts and loans, but also wants to purchase riskier "mezzanine" tranches which are deemed to be more effective.
These riskier tranches would require public guarantees, according to ECB President Mario Draghi, which is the stumbling block for Weidmann, who is also a member of the ECB's Governing Council.
"I am more skeptical about these initiatives which rely on purchasing ABSs and transferring risk from banks' balance sheets to the taxpayer," he told CNBC in Milan on Saturday.
ABS became infamous in the latter part of the last decade when the complex bundles of securities were believed to have played a key role in the global financial crash of 2008.
In a speech last week Draghi said the "senior" tranches of ABS can be considered high-quality assets. He cited data from the Association of Financial Markets in Europe which estimated that only 0.12 percent of European residential mortgage-backed securities left outstanding in mid-2007 had defaulted since that date. Weidmann told CNBC that the revival of the ABS market can be beneficial to the economy, adding that it "liberates liquidity and liberates capital in the banks' balance sheet."
However, he signaled concerns that governments should not be giving public guarantees and said that a "regulatory initiative" regarding this asset buying should be welcomed.
Peter Westaway, the chief European economist at Vanguard Group said that it was all very well that Weidmann should warn on taxpayer liability but said it could prove to be just as destabilizing if nothing was done in the first place.
"By not doing something there is also going to be risks," he told CNBC Monday.
This latest stimulus program is just one part of a slew of measures that the ECB has unveiled since June this year which Weidmann described as "comprehensive." This comes as economic data for the region have continued to disappoint. Euro zone inflation fell to a worrying 0.3 percent in August and the ECB now forecasts inflation will come in at 0.6 percent this year and will not start accelerating until 2015.
This low inflation is something the central bank should worry about, according to Weidmann, but he added it needed to be differentiated from the risk of a deflationary spiral, in which consumer price growth turns negative and consumers hold off on purchases in the anticipation of more price falls.