ECB sends mixed messages on bond purchases

(FRANKFURT) - The European Central Bank sent mixed messages Monday on its radical switch of policy to buy government bonds, with its head defending the move and the German central bank chief criticising them.

European Central Bank president Jean-Claude Trichet defended the ECB's bond buying scheme, telling a conference organised by the Austrian central bank in Vienna that it did not undermine the ECB's policy or independence.

"We are not printing money," he declared, answering directly a key criticism that a central bank which buys government debt effectively creates money over which it then cannot exert any control.

"This confirms and underpins our commitment to price stability." he said.

The ECB has come under fire for its unprecedented scheme to buy government debt in a moved aimed at halting speculative attacks in the eurozone and restoring stability to bond markets.

However, in Mainz, western Germany, German central bank governor Axel Weber, a key member of the ECB governing council, reiterated his criticism of the ECB programme.

"Monetary policy has taken new paths to fight the crisis that I continue to view critically owing to the risks" involved in buying a country's debt, said Weber, an unofficial candidate to become the next ECB chief in late 2011.

The ECB's governing council decision concerns bonds issued by troubled eurozone countries such as Greece, Portugal and Spain which commercial banks in those countries can now sell to the ECB and get cash in return.

Weber voted against the measure and has spent considerable time since explaining his position.

The German central bank governor said he was concerned above all about the ECB's independence from political pressure.

One should "draw a clear line of separation between responsibility for monetary policy and fiscal policy," Weber said.

Some analysts have argued that the ECB risks turning into a "bad bank" if it keeps buying government bonds from troubled eurozone countries.

The term "bad bank" refers to a financial structure created to take on risky debt so commercial banks can get their finances in order.

Trichet disagreed with this view.

"The latest measures address a malfunctioning of certain market segments," he said in Vienna.

"Without such measures, the market problems could have created risks to the favourable outlook for price stability. However, we have not gone beyond the goal of re-establishing a more correct transmission of our monetary policy."

Weber argued meanwhile that the ECB's duty was to maintain price stability and that only an independent central bank can do that.

"We should now limit the risks," Weber said. "The operation must be carried out in a very targeted and limited way."

It should "serve as a bridge until new state financing facilities" agreed by the European Union can take over, Weber said in reference to a massive rescue package drawn up by the EU and International Monetary Fund.

The German news weekly Der Spiegel said in its latest edition the the ECB is buying Greek bonds even though it no longer needs to because an EU-IMF rescue package for the country has already taken effect.

Quoting sources within the German central bank, the magazine claimed that the ECB was underpinning rates and allowing French banks, which have the biggest exposure to Greek debt, to sell it down.

Der Spiegel spoke of fears of a "French plot" under which Trichet, who is French, had "ceded to massive pressure" from French President Nicolas Sarkozy.

German banks have pledged to hold on to their Greek bonds until 2013, the magazine added.