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ECB to decide on bond-buying plan for reviving eurozone economy
[FRANKFURT] The European Central Bank is poised to announce a plan on Thursday to buy government bonds, resorting to its last big policy tool for breathing life into the flagging eurozone economy and fending off deflation.
Market expectations are sky-high for the ECB to unveil a large-scale programme of quantitative easing (QE) - printing money to purchase the sovereign bonds - despite opposition from Germany's Bundesbank and concerns in Berlin that this could allow spendthrift countries to slacken their economic reforms.
A eurozone source said on Wednesday that the ECB's Executive Board, which met on Tuesday, has proposed that the bank should buy 50 billion euros (US$58 billion) in bonds per month from March.
The broader, 25-member policymaking Governing Council began meeting at 0800 GMT on Thursday to discuss the proposal. ECB President Mario Draghi holds a news conference at 1330 GMT.
"I expect they will deliver, and launch a QE programme that will be probably larger than 500 billion (euros)," said Sassan Ghahramani, CEO of New York-based SGH Macro Advisors, which advises hedge funds.
Uncertainty surrounds the proposed programme's duration. The Wall Street Journal reported it would last a minimum of one year while Bloomberg said the purchases would run until the end of 2016. The ECB declined to comment on any of the reports.
The duration is significant. A programme starting in March and running for a year would total about 600 billion euros, based on a purchase rate of 50 billion per month. If a similar plan ran until the end of 2016, it could surpass one trillion euros.
A Reuters poll of money market traders on Monday showed they expected a 600-billion-euro bond-buy plan, though they also believed that would not be enough to return inflation to target.
Eurozone inflation turned negative last month; consumer prices fell 0.2 per cent, far below the ECB's target that they should rise just under 2 per cent annually.
The ECB has already cut interest rates to record lows, begun buying private sector assets and funnelled hundreds of billions of euros in cheap loans to banks, in the hope that they would lend the money on into the economy and stimulate growth.
Now its last remaining major option is QE, a policy that the US Federal Reserve, Bank of Japan and Bank of England have already used to revive growth since the global financial crisis. Eurozone policymakers are keen to prevent the kind of deflationary spiral which has plagued Japan on and off for years, resulting in weak growth punctuated by recessions.
By buying sovereign bonds, the ECB would show its commitment to pushing up inflation, while also generating a "portfolio effect" under which investors move into other assets - some of them outside the eurozone - thereby depressing the euro.
Expectations that the ECB will opt for QE are already having global repercussions.
With the euro diving against the dollar in anticipation of such ECB action, the Swiss National Bank (SNB) last week abandoned its three-year-old cap on the franc.
So heightened are expectations around the policy meeting, that French President Francois Hollande said on Monday the ECB "will on Thursday take the decision to buy sovereign debt". An official at his office said he was just presenting a scenario.
Others, mainly in Germany, are worried by QE - a measure the ECB will debate just three days before an election in Greece.
Highlighting her concerns, German Chancellor Angela Merkel repeated on the eve of the meeting that any move by the ECB to buy government bonds with new money should not be used as an excuse to put economic reforms on the back burner.
Greece's finance minister urged the ECB not to exclude it from a QE programme: "No country needs quantitative easing as much as Greece," Gikas Hardouvelis told German business daily Handelsblatt.
Against this backdrop, Mr Draghi must balance the intense market pressure to act and a need to buoy inflation on the one hand, with a desire to minimise German dissent on the other.
One option to achieve a compromise is for the eurozone's national central banks to bear the brunt of the risk of bond purchases, rather than this exposure being shared among them.
Ireland's finance minister said on Monday such a ploy would make a QE plan "ineffective", yet this scenario may nonetheless be part of the final plan, sources have told Reuters.
RBS economist Richard Barwell said this would contradict the concept of solidarity among eurozone countries, and drew on the motto of the heroes in the novel "The Three Musketeers" to make his point.
"It breaks the d'Artagnan principle of a currency union: 'one for all and all for one'," said Mr Barwell. "But I can live with that if they are not constrained on size. To signal this is much better than other alternatives."