Various quantitative-easing options focused on government bonds were shown to governors on Jan. 7 in Frankfurt, including buying only AAA-rated debt or bonds rated at least BBB-, the euro-area central bank official said. Governors took no decision on the design or implementation of any package after the presentation, according to the person and another official who attended the meeting. The people asked not to be identified because the talks were private.
A 500 billion-euro purchase program would take the ECB halfway toward its goal of boosting its balance sheet to avert a deflationary spiral in the euro area. The institution is also buying asset-backed securities and covered bonds, and government bond-buying would be part of fresh stimulus to be considered at the Governing Council’s Jan. 22 meeting.
An ECB spokesman declined to comment on policy makers’ proceedings.
“The best package is an open-ended package, a clear statement of intent to keep buying until bold objectives have been met,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc. “If they have to compromise to reach a consensus then its best that those compromises don’t constrain the ultimate size of purchases.”
Greek Woes
Greek bonds are currently rated junk at all three major rating companies. Political instability in the country that sparked the sovereign debt crisis has raised the specter of renewed market tensions.
Spanish 10-year bonds pared declines after the report. The yield stood at 1.70 percent at 12:29 p.m. Frankfurt time. The euro strengthened and was up 0.2 percent at $1.1815.
Euro-area consumer prices fell last month for the first time in more than five years and ECB President Mario Draghi has signaled the deflationary risks may demand a response. The central bank intends to expand its balance sheet toward 3 trillion euros, from 2.2 trillion euros now. Banks must repay more than 200 billion euros in outstanding loans early this year.
Balance Sheet
The staff presentation focused on government-bond purchases, the people said. Program sizes below 500 billion euros were also considered, along with monthly targets, one of the officials said.
Governors were asked not to give their opinions on the options, both people said. A minority of officials including Bundesbank President Jens Weidmann oppose buying sovereign debt on the grounds that it involves unwarranted risks and undermines the incentive of governments to make economic reforms.
Exceptions for government debt rated below investment grade, such as Greek bonds, didn’t feature in the presentation, though the treatment of such securities in previous programs was mentioned, one person said. The ECB currently grants Greek and Cypriot government debt a waiver in its operations as long as the countries stay in a program that ensures their reform efforts stay on track.
The final decision on QE will be complicated by a European Court of Justice opinion on a previous government-bond purchase program due on Jan. 14, and elections in Greece scheduled for Jan. 25. Greek opposition party Syriza, which leads in opinion polls, has campaigned on an anti-austerity platform that includes relief on the nation’s debt.
“The idea of focusing on investment-grade assets is clever as it avoids the Greek issue, which could allow them to announce the full details of the program in January,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “Eventually the ECB will need to do more.”
