ECB board cracks under pressure of solving bank and sovereign debt
In an effort to avert the spread of the crisis in the eurozone, the ECB has been consistently increasing its exposure to suspect sovereign debt and to banks faced with liquidity problems.
It has done this by buying bonds in countries that are affected, starting with Greece and, as the crisis moved on, it has been forced to buy Spanish and Italian bonds. The ECB also has huge exposure in terms of the liquidity loans it has advanced to eurozone banks.
This exposes the eurozone to huge losses if any country were to default.
All this appears to have come to a head yesterday when Jurgen Stark, a German executive board member and chief economist, unexpectedly resigned.
The euro fell and shares tumbled across the globe on the shock development, which laid bare the rift inside the central bank over the handling of the worsening debt crisis and could undermine German public support for the euro.
The total amount of liquidity loans from the ECB to eurozone banks is understood to stand at €438bn and it has acquired €129bn in government debt.
Together, these represent more than a quarter of the total assets of the entire euro system of central banks (as of September 2). And with the ECB committed to acquiring even more suspect debt as Italy and Spain come under pressure, it is fast losing control over the structure of its own balance sheet.
At a press conference after Thursday's board meeting, Jean-Claude Trichet put a brave face on recent developments, but he was clearly under pressure.
He delivered a seven-minute diatribe in defence of the ECB when a reporter suggested that Germans were increasingly worried about the bond-buying programme, suggesting instead that the ECB had an "impeccable" record on inflation.
But inflation is clearly not his -- nor Germany's -- most immediate concern.
Mr Trichet also spelled out on a few occasions during the conference -- without being asked or prompted -- that the ECB's chief responsibility is to support banks and that the bond-buying programme in support of member governments is secondary to this.
Obviously he felt under pressure to defend his actions amid growing conflict among the ECB board members on the bank's policy of buying eurozone government bonds.
Clearly Mr Stark doesn't agree with the ECB's bond-buying programme and quit abruptly yesterday.
He must believe that the bond-purchase programme is undermining the ECB's primary responsibility to defend the banks and that it can not do both.
This is the same reason why another German board member, Axel Weber, quit in February. Both must feel that the path that the ECB is taking to stem the spread of the crisis is putting the eurozone at a wider risk.
Yesterday's resignation has made the ECB's impossible double job of bond buybacks while supporting the banks a lot more difficult.