Germany's powerful Bundesbank pushed back on Friday against European Central Bank President Mario Draghi's pledge to do whatever is necessary to protect the euro zone from collapse, but markets rallied on a report of imminent policy action.
French newspaper Le Monde reported that the ECB and euro zone governments were preparing co-ordinated action to cut Spanish and Italian borrowing costs. European shares extended gains to trade some 1 percent higher after the report's release.
The newspaper, citing unnamed sources, said the ECB was willing to take part in the action if governments agreed to tap the bloc's bailout funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). The report came a day after Draghi, in his boldest comments since taking the ECB's helm last November, pledged to do whatever was necessary to protect the euro zone from collapse.
Markets took Draghi's pledge as a signal that the central bank is ready to defend Italy and Spain, whose borrowing costs have hit unsustainable levels, by buying their bonds.
But the Bundesbank regards central bank purchases of sovereign debt as monetary financing of governments, from which the ECB is prohibited by European law. The German national central bank's resistance could narrow the ECB's options. "The mechanism of bond purchases is problematic because it sets the wrong incentives," a Bundesbank spokesman told Reuters. The Bundesbank saw the possibility of the EFSF bailout buying government bonds "as less problematic", the spokesman added.