DEBT FINANCING. Analysis: the ECB's Stark Output reaches eurozone unstable at worst moment

PARIS (Reuters)-the resignation of high-ranking German on European Central Bank could hardly have been worse for the euro zone policymakers as they grope for a solution to the crisis deeper in the history of 12 years of the single currency.
The ECB is an institution which has maintained the zone euro afloat in the sovereign debt crisis and avoid a collapse of the bond market. The European Union has no common tax authority or the federal Government and talks to many dissonant voices.
Juergen Stark departure of the Executive Council of the ECB in despair with the purchasing policy of government bonds to prevent the spread of the crisis comes as policymakers in Berlin and beyond are preparing for the growing possibility of a Greek default.
It seems bound to complicate the next round of crisis management, because he has injected the poison of Interstate policy, as well as the ideological division in independent central bank.
"It is the ECB is holding the show together, so anything that weakens the ECB is bad news," said an employee I involved in the management of financial crises.
Stark output will further sap the credibility of the ECB with conservative financial establishment of Germany, which saw the purchase link as an irregular form of financing of public debt and among the voters in Europe's largest economy.
This could make a larger eurozone fiscal integration politically more difficult to achieve at a time when Chancellor Angela Merkel is coming to realize that a great leap forward in economic governance is needed to preserve the single currency.
Runs the risk of importing a North-South Division, between creditor countries virtuoso self-styled and peripheral States seen as wasteful and unreliable, the central bank.
At worst, Stark departure may restrict the ability of the ECB to act decisively in the coming months, when the debt crisis enters a stage even more dangerous.
PARALYZED
"This comes at a very, very bad and is certainly serious," said Jean Pisani-Ferry, Director of the economic think-tank Bruegel in Brussels.
"If the ECB is handcuffed in their ability to buy Italian and Spanish titles and at the same time, we must make a real restructuring of debts of Greece, with a good haircut, we risk a clash of contagion spreading to other countries. If the ECB is hamstrung by lack of consensus, which is the risk ".
A growing number of policymakers, as well as market economists, believe it is only a matter of time before Greece, that keeps getting back on their budgetary targets, will have as default.
A source in the G7 this weekend meeting of Finance Chiefs in Marseille, said the EU troika, the ECB and IMF inspectors, which suspended last week for talks with Athens, probably would find a formula in its progress report to allow the next installment of 8 billion euros (US $ 11 million) of aid to be paid in October.
That would keep Greece going for another couple of months until the European Parliament approves new powers for the EFSF give Rescue Fund preventive lines of credit to Member States of the eurozone, to buy securities in the secondary market and lending money to recapitalise banks.
The source said that the German Finance Ministry was increasingly convinced that Greece will not be able to avoid default for much longer, so making the debtor weaker eurozone and limit contagion is crucial.
Even though the EFSF has their new powers, you will need the unanimous agreement of the euro zone 17, the Member States to use them, with the German Parliament, having gained only a greater supervisory role on those decisions. Political obstacles abound.
Markets may run up to the euro area bond yields again in anticipation of ECB purchase and delivery obligations of the EFSF inexperienced, traders say.
The ECB has bought so far a total of 135 billion euros worth of titles Italian, Spanish, Greece, Ireland and Portugal.
The Rescue Fund may find themselves short of fire in a crisis. It will have approximately 380 billion in uncommitted funds. Italy alone has 1.9 trillion euro of outstanding government bonds, of which 45 per cent are held by foreigners.
TOUGHER LINE
The replacement of Stark in the ECB's Board by German Junior Finance Minister more pragmatic Joerg Asmussen, the experienced crisis manager proposed by Berlin on Saturday, can reduce ideological tensions in the central bank.
But it can also force the incoming ECB President Mario Draghi, who succeeds Jean-Claude Trichet on November 1, to take a harder line by ending with purchases of titles and adheres to the core mandate of fighting inflation.
Draghi has warned Governments, including his native Italy, that purchase of continuous connection cannot be granted.
"The next step will be increased pressure on the ECB to keep their hands clean. Stark is the German school that sees this type of intervention so bad in principle, "said Josef Janning, research director at the European policy centre in Brussels.
"Its likely successor will be less Orthodox and more of a political crisis manager. But Stark could use their new freedom to speak out. That could make things more complicated for Merkel and Draghi, "said the German political scientist.
Stark's resignation could also affect international confidence in the ECB and the euro zone at a crucial moment.
"Politics was never completely absent from the ECB but this has now been strengthened. This awakens the idea that the ECB is still a structure that amalgamates national institutions and views, not mainly individuals belonging to its Board of Directors, "said Pisani-Ferry.
"You have to think about this appearance of New York. It seems as if these people still cannot sit around the same table and find out things. "
(US $ 1 = € 0.729)
(Additional reporting by Annika Breidthardt in Marseille and Luke Baker in Brussels; Edited by Kevin Liffey)
(This story corrects debt figure in Italian number 19 to $ 1.9 trillion euros, not billions)

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