FRANKFURT, Jan 9 (Reuters) - The European Central Bank is considering a dual approach to government bond purchases which would involve both it buying debt and sharing the risk across the euro zone and, in a nod to German qualms, separate purchases by national central banks.
Sources familiar with the discussions said such a bond-buying option, also known as quantitative easing (QE), is among the tools the ECB is preparing ahead of its Jan. 22 policy meeting should it decide to act to address falling consumer prices and a growing risk of deflation in the euro zone.
Several QE plans are under discussion and nothing has been decided so far. But the debate reflects the ECB’s efforts to build a robust programme that meets German concerns about how much it would take of the risk yet convinces investors anticipating an unlimited money-printing pledge.
Markets and many economists believe anything short of an unlimited money-printing pledge will fail to revive a moribund euro zone economy.
The ECB Governing Council discussed the situation at a dinner on Wednesday night as it gathered for a regular non-policy meeting. One central bank source said there was “clearly more of a consensus than before” that QE might be necessary.
“On the rest, there are still pretty much divergent views on the whole range of issues - volume, open-ended or closed, risk sharing or not, whether there are contingencies and which ones. It’s still very open,” the source said.
Another central bank source said one of the options that was discussed was one where the ECB would buy a certain share of the total programme and in case of default the risk would be shared among national central banks depending on their capital share.
The remaining part of the programme’s volume would be bought by national central banks, but at their own risk.
“There was no fundamental opposition against this option on Wednesday,” said the source. “This could be an option, which the Bundesbank could go along with.” But the source said there was no decision yet and the discussion remained very much open.
“This is one option that is being discussed and it may go in this direction, but nothing has been decided,” the source said.
An ECB spokesman said: “We do not comment on Governing Council discussions.”
SQUARING THE CIRCLE
The U.S. Federal Reserve, the Bank of Japan and the Bank of England have turned to QE to revive their economies, but in the euro zone, which is more reliant on banks and which has no common fiscal regime, QE is more difficult to implement.
Germany’s Bundesbank is one of the most vocal opponents of such a step as it fears the bloc’s largest economy may end up paying for risk accumulated elsewhere. It is also concerned that QE could lower the incentive for crisis countries to reform.
One of the central bank sources said that the German opposition to QE was softening “to some extent”. “To the extent that it does not involve risk-sharing, it’s easier for the Germans,” the source said.
But critics say any plan falling short of the ECB’s traditional approach of one monetary policy for the 19 countries that share the euro would undermining the unity of the currency union.
Under the Securities Market Programme (SMP), launched at the height of the crisis, the ECB and the national central banks bought government bonds from countries like Greece, Ireland and Portugal under the premise to share future profits and losses along the ECB’s capital key.
This is again an option now, but hardly palatable for the Bundesbank, which suggested that national central banks should buy the debt of their own governments, confining the risk to the country in question.
Economists question the effectiveness of such an plan, which may send the wrong signal to private investors. A mix could serve as a compromise.
The first central bank source also expected a mixed system with some central ECB buying, but “a large part will be national central banks buying”.
The second central bank source said the ECB’s share could, for example, be somewhere between 20 and 40 percent.
He gave a ballpark figure of 500 billion euros for the overall size of the programme, though stressed that calculations were still underway to determine how large the programme needed to be in order to prop up inflation expectation.
Other sources said the ECB might alternatively set a monthly purchase limit but set no deadline for ending purchases and announce no overall volume for the programme.
An ECB study from last year showed 1 trillion euros of asset purchases spread over a year would boost inflation by just 0.2 percentage points, while another model pointed to a 0.8 percentage point uplift.
Legal limitations may require the ECB to put a cap on its purchase programme. An influential adviser to Europe’s top court will give his view on Jan. 14 about an earlier similar bond-buying scheme. (Additional reporting by Noah Barkin in Berlin and Frank Siebelt in Frankfurt Editing by Jeremy Gaunt)
Our Standards: The Thomson Reuters Trust Principles.