Was Bundesbank Weidmann making a thinly veiled threat? Barclays thinks so.

Genevieve Signoret

Bundesbank President Jens Weidmann, who sits on the ECB Governing Council, is quoted by FT yesterday as saying that “monetary financing will set the wrong incentives, neglect the root causes of the problem, violate the legal foundations on which we work, and destroy the credibility and trust in institutions… Fixing an interest rate for a country is certainly not compatible with our mandate. You would guarantee a certain refinancing cost for a government and you could not argue that this was not monetary financing.”

In a research note to clients yesterday, Barclays wrote that it interprets “this as a thinly veiled threat of a possible legal challenge to those that may still push the ECB to anounce ‘unlimited support’ for euro area sovereign debt markets including Italy’s”.

I agree that he does not think that bailing sovereigns is legal. Here’s that interview again:

JW: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.

But I hear no threat. Just someone balking.

At least we have the ECB explicitly calling itself a lending of last resort.