Bonn at war with the Bundesbank over revaluation of gold:
By Janet Northcote FRANKFURT, May 28 (Reuter) - Germany's powerful Bundesbank and the Bonn government entered open conflict on Wednesday as the central bank rejected Bonn's plans to revalue its assets and the government said it would go ahead regardless.
Finance Minister Theo Waigel wanted to revalue the bank's gold and currency reserves to give a much-needed injection of cash to Bonn's public finances as it scrambles to cut back its deficits to make the grade for European monetary union.
But the Bundesbank warned that Bonn's scheme -- which calls for a special profit transfer to be made this year and next on the basis of the higher valuation of gold and currency reserves -- could undermine the euro from the start.
"The payout would only make a limited contribution to the lasting improvement of public finances," the bank said.
"In contrast, the negative knock-on effects on the interpretation of the entry criteria and the stability policy credibility of the selection of participants in May 1998 would scarcely be avoidable," it added.
The Bundesbank condemned the plan as "interference" in the its monetary policy and said it was not in line with changes which must be made to central bank balance sheets ahead of the transfer of monetary policy power to a European central bank.
Financial markets were caught off-balance by the strength of the Bundesbank's reaction. Bund futures traded in Chicago fell in afternoon dealings, trading down 0.20 point at 100.50.
The dollar originally spiked up against the mark on news of the Bundesbank protest, but eased to trade at about 1.6950.
Chancellor Helmut Kohl's coalition, undaunted, said it would go ahead despite the Bundesbank objections.
Kohl, Waigel and Free Democratic Party (FDP) leader Wolfgang Gerhard and their parliamentary floor leaders said: "The coalition will strive to include the revaluation of the reserves into the current legislative process."
In a two-page statement issued shortly after the central bank's announcement, the centre-right coalition denied the plan would affect the Bundesbank's stability and independence.
"The successful stability policies of the Bundesbank as well as its sole monetary political responsiblity will not in any way be hampered by the planned adjustments of the currency reserves," the statement said.
"The financial solidity of the Bundesbank will be completely protected through the cautious revaluation. Even today the gold reserves in most European central banks are already valued much higher than they are at the Bundesbank."
Bundesbank reserves are currently valued according to the lowest price principle. Bonn wants the reserves to be valued at a level much closer to the real market price to raise around 20 billion marks ($11 billion) in a series of revaluations.
It aims to siphon of the resultant book profit and use it to retire debts accumulated due to German unification.
But the idea is anathema to Germans, proud of the central bank's conservative stance and determined that they should not surrender their cherished marks in exchange for an untried and potentially unstable single European currency.
Bundesbank approval is not needed for the legislative changes needed to go ahead, although it could pave the way for a stormy parliamentary debate on the legal revisions.
Waigel's plan had already prompted a storm of protest and official comment as observers judged the scheme as every bit as dubious as steps taken in other countries -- which Waigel had condemned -- to drum up funds to stop holes in the budget.
Countries wishing to enter monetary union must cut have a 1997 budget deficit of no more than three percent of gross domestic product. Bonn's figure for 1996 was 3.8 percent.
While both Bonn and the Bundesbank apparently agree that the funds can only be used to reduce debt, and not directly to reduce the deficit, the move is nonetheless seen by many as falling into the same category as Italy's special Eurotax.
In just a taste of what is to come in domestic reaction, Ingrid Matthaeus-Maier, financial expert for the opposition Social Democratic party, said on Germany's main evening news broadcast, "I am very alarmed about the course of events."
"That is a break in the decade-long tradition of stability, against the will of the Bundesbank, a hectic effort to reduce debts by grabbing the gold treasure."
Independent analysts, who had feared the Bundesbank could cave in to Bonn, were cheered by the central bank's stand but disturbed by the clear rift between Bonn and the central bank.
"This was a punch in the jaw for the German government and what we are seeing is a showdown between the Bundesbank and the government," said Armin Kayser at Swiss Bank Corp in Frankfurt.
Holger Fahrinkrug at UBS in Frankfurt agreed, "The (Bundesbank) statement points out that the basic budgetary problem is still there, just as before -- Germany is going to find it difficult to meet the three percent criteria."
18:55 05-28-97
By Erik Kirschbaum BONN, May 28 (Reuter) - Several German newspapers warned in commentaries in Thursday editions that the dispute between the government and the central bank over Bonn's plans to revalue its reserves will be a costly battle with an uncertain outcome.
The nation's largest daily tabloid, Bild, said it expected lots of turbulence as the German government, desperate to raise billions of marks to cover debt, squares off against the Bundesbank, eager to maintain its impeccable credentials.
"The government and the Bundesbank are on a confrontation course with an uncertain outcome," Bild said. "But one thing is sure -- there will be more than one bloody nose in this fight."
The newspaper said Germany's high-handed insistence that other European countries refrain from budgetary tricks to qualify for Europe's single currency would now come back to haunt Bonn as it revalues the reserves to get a badly needed injection of cash.
"It is a classic conflict between the independent-minded protectors of the currency and the politicians who want to fill their empty state coffers," Bild said.
"Bonn's obnoxious and loud insistence about the need for discipline will now come back to haunt it. It will be a painful awakening."
The conservative daily Die Welt said in a page one editorial headlined "The Lustre is Gone" that the Frankfurt-based Bundesbank had to raise objections to the government's plans or risk seeing its vaunted credibility in financial markets erode.
"Frankfurt is gluing together the porcelain which Bonn smashed," the Berlin-based daily said.
"However clever the gold trick may be, it is not a brilliant manoeuvre. The disdain with which other EU partners were treated due to their manipulation is now coming back to hit the Germans.
"The coalition has won money, but gambled away trust. The Bundesbank could take some of the horror out of this trade-off."
Die Welt said that even if on the surface there was nothing too objectionable about the idea of valuing the Bundesbank's gold and currency reserves at a price closer to market levels, the government made a huge mistake with the timing of the move.
"Forcing a swift booking of the profits into the reference budget in order to qualify for Maastricht (single currency) is a questionable move," the normally pro-government paper said.
"The grab for gold appears to be the panic reaction of a trapped individual -- in the sea of debt every straw counts."
Countries wanting to enter European Monetary Union must have a 1997 budget deficit of no more than three percent of gross domestic product.
Bonn's figure for 1996 was 3.8 percent and without the 20 billion marks gained from the reserves there appears to be little chance Germany will qualify for EMU.
Die Welt's editorial said the Bundesbank was right to stand up to the government. The central bank's firm position would ultimately be good for the deutschemark and good for the euro, it said.
"In the end it is a matter of damage to a good thing which is valued higher than all convergence criteria -- the credibility of the anchor currency, the mark," the paper said.
"The stability of the euro is decisively dependent on whether a European central bank can hold its ground against calls for looser money. If even the Bundesbank, the glowing example of this autonomy, yields, then an even longer shadow is cast over the euro."
"The Bundesbank dared to utter warning objections," the newspaper continued. "With this it is fulfilling its role and doing a service to the euro project. It has signalled that political attacks on the independence of the guardians of the currency are bad and can lead the European currency into a cul-de-sac.
The Berliner Morgenpost daily quoted government sources as saying that Chancellor Helmut Kohl had spent the last several days trying to persuade Bundesbank President Hans Tietmeyer that the revaluation was the right move.
18:43 05-28-97
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