Germany Rules out Using Reserves or SDRs to Boost

* German central bank angered at talk of using reserves

* Euro zone seeks ways to boost bailout funds

* U.S. official speaks favorably of SDR leveraging role

* Merkel aide: no threat to Bundesbank independence


BERLIN, Nov 7 Chancellor Angela Merkel has ruled out using gold and currency reserves or IMF special drawing rights to boost the euro zone bailout fund for fear of violating the independence of Germany’s central bank, which opposes such use of reserves.

German sources said the proposals had caused tension between Bundesbank President Jens Weidmann and German Finance Minister Wolfgang Schaeuble, and between Weidmann and the European Central Bank, during last week’s G20 summit in Cannes.

The issue came up because Europe is worried that, with its partners in the Group of 20 wary of investing in European Financial Stability Facility (EFSF) instruments, it needs other ways to boost the 440 billion-euro fund without compromising the top-grade credit ratings of member states like France.

When word got out that the ECB had been asked to look into how euro zone countries’ reserves or SDRs — special drawing rights at the International Monetary Fund — could be pooled to leverage the EFSF, the Bundesbank reacted angrily, German sources said.

This was depicted in the German media as an attempt to use “German gold” held by the Bundesbank, whose independence is sacrosanct, to further fund bailouts which are already a source of growing impatience among the German public and politicians.

“German gold reserves must remain untouchable,” said Economy Minister Philipp Roesler, head of the Free Democratic Party (FDP), the junior partner in Merkel’s coalition, which is already under pressure from eurosceptics in the party and could not afford any more euro zone demands on Germany’s coffers.

“We know this plan and we reject it,” said a spokesman for the Bundesbank at the weekend.

In Washington, a U.S. State Department official spoke favorably about the idea of using SDRs to leverage up the EFSF but acknowledged that it was opposed in some European circles.

“The SDR option is certainly a possibility to augment the resources of the EFSF,” Robert Hormats, under secretary of state for economic affairs, said at a Reuters Washington Summit.

“They don’t have a lot of options so this may turn out to be one that’s useful,” he said during an interview at Reuters’ Washington office.

The Obama administration has made the point that the euro zone’s central bank needs to play a strong role in dealing with the crisis, akin to that taken on by the Federal Reserve during the 2007-2009 financial crisis when it stepped up to become a credit backstop for the economy.

There is evident reluctance, however, in Europe for it to do so.

Merkel’s spokesman, Steffen Seibert, denied there was any consideration being given to plans that would impinge on the independence of the Bundesbank, which he called a “central element of German economic and financial history.”

“In Cannes some participants asked if IMF special drawing rights could be used. These special drawing rights are controlled by the Bundesbank, just like Germany’s gold and foreign currency reserves,” Seibert told a news conference.


“The chancellor told our international partners in Cannes … that in the German view, according to our law, the Bundesbank controls them, its independence is well known, and the chancellor made it quite clear that she could not back any such agreement,” said Seibert.

German newspapers reported at the weekend that such plans intended to use German reserves, or its SDRs, to boost the country’s contribution to the EFSF crisis fund by more than 15 billion euros ($20 billion).

This would appear to contradict the often-repeated promise of Merkel’s government that Germany’s maximum contribution to the fund was 211 billion euros and would not be increased under any circumstances.

Germany and France have been at odds about how to leverage the EFSF. The French favor letting it operate as a bank that could borrow from the ECB but Merkel and Jean-Claude Trichet, who has just stepped down as ECB president, opposed this, partly on the grounds that it should not be used to finance governments.

It was unclear whether Germany’s opposition meant the reserves issue would not be on the agenda of a Eurogroup meeting of finance ministers of the 17-nation euro zone in Brussels on Monday.

Euro zone leaders want to boost the EFSF’s firepower to about 1 trillion euros to convince markets that they can cope with potential contagion of the debt crisis to Italy and Spain.

The main proposals are a debt-insurance scheme offering investors in sovereign bonds a payout if that country were to default, which leaders hope would encourage reluctant investors to buy euro zone government bonds, and setting up a special investment vehicle giving foreign investors a less risky way to buy euro zone debt.

However, Merkel said in Cannes there had been limited interest from among G20 nations.

Austria’s finance ministry said Monday it was prepared to discuss using SDRs to boost the EFSF, but that “many questions remain unsolved.”

“SDRs are not reserves in the usual sense. We would also rule out the use of reserves,” spokesman Harald Waiglein said.

The Austrian central bank said its foreign currency and gold reserves were “untouchable” but that responsibility for SDRs was shared with the finance ministry and a proposal would merit joint scrutiny by both institutions.


By Stephen Brown

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