The European Central Bank could decide this week on whether to increase its capital -- giving it a cushion against any losses on its bond purchases -- after Germany threw its weight behind the idea on Tuesday.
The ECB's policy-setting Governing Council will discuss a possible capital hike when it meets on Wednesday and Thursday, a euro zone central bank source said.
The ECB is considering the capital increase to allow for the risk of potential losses from the government bond purchases it is making to counter market selling pressure, euro zone central bank sources have told Reuters.
This week's meeting is the Council's last of the year.
Germany said it would back such a move, which would increase the ECB's firepower for its bond buying program -- its contribution to a rescue package hastily brought in at the height of the euro zone's debt crisis.
If such a request comes, we will judge it positively, a German official said, briefing reporters on the government line ahead of a summit of European Union leaders in Brussels on Thursday and Friday. The ECB will meet in Frankfurt.
I don't rule out that Mr (ECB President Jean-Claude) Trichet will mention this at the (summit) dinner, the official added when asked about a possible ECB capital increase.
Under ECB rules, governments would have no official say in any capital increase as only the central bank's 22-member Governing Council vote on such moves.
Governments would be directly affected, however. National central banks would have to funnel their profits from cash handling and interbank market lending to the ECB to boost its capital, rather than to their governments as normal.
If a national central bank did not have enough spare cash it would also open up the possibility that governments would have to stump up funds.
Since May the ECB has bought 72 billion euros of government bonds as part of a 750 billion euro EU/IMF rescue package. Most analysts believe it is concentrating its purchases on euro zone debt trouble spots Ireland, Greece and Portugal.
Asked what the ECB would expect to achieve by raising additional capital, the German official said:
I imagine the ECB would hope to strengthen its basis in order to show the markets that it was well capitalized, if for example, it wanted to buy additional sovereign bonds.
Those remarks appeared warmer toward the bank's bond-buying than comments from ECB policymaker Axel Weber, the president of Germany's Bundesbank, who has publicly criticized the program.
Markets are watching the ECB and other European policymakers for any signs on the pace of future bond purchases -- which dealers say has halted the surge in costs of borrowing for the euro zone's peripheral issuers.
GERMAN BUDGET HIT
The ECB's subscribed capital is almost 5.8 billion euros compared with a balance sheet of almost 138 billion euros, according to its latest annual report.
One source said among the options being discussed was a doubling of the ECB's capital. Another source said it was not yet clear how much the bank would ask for.
One senior conservative lawmaker in Germany said separately that it could divert some Bundesbank profits to an ECB capital increase if necessary, denting one source of government revenue.
If a capital increase should prove necessary, we'd have to bite the sour apple and reduce the Bundesbank dividend payout to the federal budget, Norbert Barthle, a budget expert with Chancellor Angela Merkel's conservatives, told Reuters.
A decision to bolster the ECB's capital now would come at a time when central banks and governments are struggling with the cost of the financial crisis and recent turmoil on the currency bloc's financial and debt markets.
The cost of tackling the euro zone's debt woes is a big problem for Merkel, whose government is the bloc's main paymaster. The chancellor, whose popularity has sunk during the crisis, faces seven state elections next year.
A senior commercial banker said the ECB needed more capital because of the prospect of haircuts -- an erosion of the bondholders' benefits -- on sovereign debt in peripheral euro zone states down the line.
Germany did not expect any discussion of the euro zone's rescue fund, the European Financial Stability Facility (EFSF), at the Brussels summit, the German government official said.
We don't think it will be discussed or that decisions will be made to change it. We don't believe there is any need to do so at the moment either, he added.
For ECB legal rules on capital hike see page 243 on
(Additional reporting by Matthias Sobolewski in Berlin, Edward Taylor in Frankfurt and Luke Baker in Brussels, writing by Paul Carrel; editing by Patrick Graham/Ruth Pitchford)