ECB rift over bond buys adds to euro pressure

Germans said to fret secret French bailout

By William L. Watts, MarketWatch

LONDON (MarketWatch) -- The European Central Bank's decision to purchase distressed government bonds issued by peripheral euro-zone governments has helped soothe credit markets, but aren't doing much to buoy up the beleaguered euro.

An apparent rift between top ECB officials, which has even featured German media accusations of a French-led "conspiracy" aimed at shoring up French banks, hasn't helped, economists said.

A report in the German magazine Der Spiegel over the weekend said the ECB's purchases of Greek bonds, despite the fact Athens has already received money from a 110 billion euro ($134.4 billion) European Union rescue fund, had led German central bankers to suspect a French plot.

Technicals suggest euro to drop below $1.20

The push into fresh 2010 lows below 1.2143 in EUR/USD represents an effective 17% drop for the beleaguered euro since setting its 2010 high at 1.4580 in January, but there's scope for further downside to the 1.2000 level and the 1.1721 target.

After all, the report said, the move gives French banks an opportunity to unload Greek bonds, while German banks must sit on their hands after promising German Finance Minister Wolfgang Schaeuble they would hold Greek debt until 2013.

"The main issue in the public debate is why Greek bonds are being bought although the aid program for Greece has long since been passed and first funds have been transferred," said Ulrich Leuchtmann, head of currency strategy at Commerzbank in Frankfurt.

"The purchase of Portuguese or Irish securities on the other hand makes much more sense, as the general rescue fund for euro-zone countries has been agreed but not set up yet."

If German central bankers suspect a conspiracy, they haven't expressed it publicly.

German Bundesbank President Axel Weber on Monday did make it clear he's not a fan of the policy, arguing for a strict cap on purchases. Weber, seen as a potential successor to Trichet, warned that the program carries "substantial stability risks."

That puts him at odds with ECB President Jean-Claude Trichet, who has used a series of interviews in an effort to overcome qualms the bond purchases could spark inflationary pressures.

Trichet has argued that the moves fall short of creating new money through quantitative easing and that the ECB remains focused on maintaining price stability.

Bond purchases have totaled at least €35.5 billion over the first three weeks of the program, according to ECB figures, which don't offer a regional breakdown of the purchases.

"We do not participate in speculation abut possible conspiracies in the purchase of Greek bonds," Leuchtmann said, adding that it is "a lack of transparency" that inevitably leads to such suspicions.

"Even though the ECB publishes data on how many bonds have been purchased it does not state what securities these are," he said. "Also the issue of how long these purchases will continue remains unclear. As a result, the question of what would happen on the bond markets if the ECB would stop the purchases is putting pressure on the euro."

The euro /quotes/comstock/21o!x:seurusd (CUR_EURUSD 1.2193, -0.0054, -0.4409%) slipped to a new four-year low of $1.2110 versus the dollar on Tuesday before rebounding as risk appetite revived. Analysts say a failure to hold support around the $1.2120 level in the near term would be likely to open up a test of the $1.20 level.

William L. Watts is a reporter for MarketWatch in London.