Germany threw its weight on Tuesday behind a potential capital increase by the European Central Bank, saying it would react positively to such a move if the ECB deems it necessary.
Euro zone central bank sources have told Reuters the ECB is considering requesting an increase in its capital from euro zone member states as a cushion against any potential losses from its bond buying program.
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 on Thursday and Friday.
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.
Since May the ECB has bought 72 billion euros of government bonds as part of a 750 billion euro EU/IMF rescue package hastily brought in at the height of the euro zone's debt crisis. 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 its bond purchases going forward -- 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 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.
(Additional reporting by Matthias Sobolewski in Berlin, Edward Taylor in Frankfurt and Luke Baker in Brussels, writing by Paul Carrel; editing by Patrick Graham)