April 8 (Bloomberg) -- Bundesbank President Ernst Welteke faces mounting pressure to resign after losing the support of the German government that appointed him in September 1999.

Welteke, 61, agreed yesterday to take leave of absence at the Bundesbank's request as Frankfurt prosecutors probe a 7,661-euro ($9,305) hotel stay in Berlin paid for by Dresdner Bank AG. The Finance Ministry criticized the decision, saying today it assumes Welteke ``out of respect for his office and the central bank as an institution will draw the necessary conclusions.''

``Without the backing of the government, it will be hard for him to return to perform his presidential duties at the Bundesbank,'' said Julian Callow, an economist at Barclays Capital in London. ``There are credibility issues raised here.''

Welteke, who took over the Bundesbank after Germany lost control of European interest-rate policy in 1999, helped oversee the introduction of euro notes and coins three years later. He was also charged with slimming down the central bank and cut a quarter of the workforce, to reflect its diminished role.

The German central bank named Vice-President Juergen Stark, 55, to temporarily assume Welteke's duties, which include representing Europe's biggest economy at the Frankfurt-based European Central Bank's interest rate meetings each month. The ECB next meets to set rates on May 6.

Party Member

A member of German Chancellor Gerhard Schroeder's Social Democratic Party, Welteke was picked to succeed Hans Tietmeyer after Helmut Kohl lost national elections in 1998.

The Bundesbank, whose board met for more than eight hours yesterday, said it didn't have sufficient grounds to demand Welteke's resignation. The bank didn't say how long the leave will be or whether Welteke will be paid during that time.

``The representatives of the Bundesbank must, to a very particular extent, be unassailable and unimpeachable. From the government's viewpoint, it's therefore inescapable to reach a swift and unequivocal decision in this case,'' Finance Ministry spokesman Joerg Mueller said in a statement faxed to news organizations today.

The Bundesbank today said it has adopted the ECB's rules on conduct, which are more specific than the Bundesbank's and don't allow council members to accept gifts ``in excess of a customary or negligible amount, whether financial or non-financial.''

Family Bill

Welteke, who earns 350,000 euros a year at the Bundesbank, this week repaid Dresdner Bank half of the four-night hotel bill at Berlin's Hotel Adlon that he incurred together with his wife, two sons and a girlfriend of one of the sons at an event celebrating the introduction of euro notes and coins in 2002. The Bundesbank repaid the other half of the bill.

Dresdner Bank, a unit of Allianz AG, is one of the German banks that the Bundesbank helps oversee. Some officials at Dresdner Bank are also being probed by prosecutors. Welteke's terms of employment at the Bundesbank state that he is prohibited from deriving personal gain from his position.

Welteke has said repeatedly that he doesn't see a reason to resign. In an interview with the ARD television channel late Tuesday, he said: ``It is always difficult to draw the line between a business trip and a private trip.'' On Saturday, when the hotel stay was reported by Spiegel magazine, Welteke asked journalists in Ireland: ``Should I pay?''

``Assuming we know the facts of the case and there's not a good explanation for this, I think it shows a real lapse in judgment,'' said Morris Goldstein, a senior fellow at the Washington-based Institute for International Economics. ``If you had something like that in this country you'd have quite an outcry, because it certainly has the appearance of a conflict of interest.''

Schroeder's Choice?

After the Bundesbank recommended that he take a leave of absence, Welteke agreed, the statement said. Under the statutes of the European System of Central Banks, the Bundesbank could only fire Welteke in the case of a ``serious transgression.''

Schroeder wants Deputy Finance Minister Caio Koch-Weser to replace Welteke, German business daily Handelsblatt reported, without saying where it got the information. Koch-Weser, 59, is responsible for international finance at the ministry. Stark is a member of the opposition Christian Democratic Union.

Schroeder, who turned 60 yesterday, is currently on vacation in Italy and has been in contact with the government about Welteke, his press office said.

Finance Minister Hans Eichel said on Monday that cabinet rules wouldn't permit any of Schroeder's 14 ministers to remain in office after conduct such as Welteke's. Two months ago, Florian Gerster was fired as head of the Federal Labor Agency after weeks of criticism from opposition parties for awarding consulting contracts that were not put out to tender.

Before the advent of the euro, the Bundesbank was one of the world's three most powerful central banks. Attracted by Germany's low inflation record and strong currency, European countries pegged their exchange rates to the deutsche mark and moved interest rates in line with the German central bank.

To contact the reporter for this story: John Fraher in Frankfurt at jfraher@bloomberg.net.

Last Updated: April 8, 2004 07:47 EDT