October 27, 2014 / 2:50 PM / 5 years ago

ECB stimulus may lack desired scale, QE an option - sources

FRANKFURT (Reuters) - The European Central Bank’s plan to buy private sector assets may fall short of its goal and pressure is likely to build for bolder action early next year, with government bond purchases an option, ECB sources said.

The euro sign landmark is seen at the headquarters (R) of the European Central Bank (ECB) in Frankfurt September 2, 2013. REUTERS/Kai Pfaffenbach

The euro zone’s central bank started buying covered bonds last week and plans to buy asset-backed securities (ABS), or bundled loans, later this year — both with a view to fostering lending to businesses and thereby supporting the bloc’s economy.

ECB President Mario Draghi has said he wants the purchase plans, together with the provision of new cheap loans to banks, to increase the ECB’s balance sheet towards its levels of early 2012 — up to 1 trillion euros higher than today.

But the illiquid nature of the ABS market and the scarcity of quality paper available to buy means the ECB may struggle to achieve the stimulus effect it wants with the current programme.

The ECB’s offer to banks in December of a second round of long-term loans, or TLTROs, may help it make progress towards the balance sheet target, but the paltry take-up of the first offer — just 82.6 billion euros — does not bode well.

“Some people know that this (the current purchase plan) will not work. It’s too small and the problem is much, much bigger,” said one source familiar with the matter.

The second source added: “We’re perfectly aware these two markets are not that simple and certainly on their own will not be sufficient to expand our balance sheet as we intend.”

Asked to comment for this story, an ECB spokesman said: “The targeted long term refinancing operations (TLTRO) and the purchases of ABS and covered bonds have to be seen as a package. The overall impact of these three measures on the balance sheet size of the Eurosystem will be sizeable.”


Policymakers are desperate to revive the euro zone economy, which is barely growing and dogged by low inflation of 0.3 percent, far below the ECB’s target of just under 2 percent.

ECB Vice President Vitor Constancio said this month the stock of covered bonds eligible for purchase by the ECB amounted to about 600 billion euros. Around 400 billion euros of ABS qualify for purchase by the ECB under its new plan, he added.

The first source said the amount of ABS the ECB would actually purchase would be “much lower” than 400 billion euros. Tight supply risks pushing up prices for the paper, which would make it harder for the ECB to buy.

“It may lead to a much lower volume,” said the second source.

To augment its stimulus, the ECB is considering buying corporate bonds and may decide on the matter as soon as December with a view to begin purchases early next year, several sources familiar with the situation told Reuters last week.

Buying corporate bonds would widen out the ECB’s private-sector asset-buying programme, but could also prove problematic.

“It’s a peculiar market. It’s difficult to achieve volume,” the first source said.

Bond market participants and analysts say a shortage of bonds to buy would make the scheme more symbolic than substantive.


Draghi has stressed that the ECB alone cannot tackle the euro zone’s woes, urging crisis-hit countries to reform. He has also made a thinly veiled appeal for Germany to embark on a round of deficit-funded investment spending.

But with countries taking time to reform and Germany wedded to strict budget discipline, the heavy lifting to support the flagging euro zone economy is falling to the ECB.

The limitations of its existing asset purchase plans, and even possible corporate bond buying, leads to the question of whether the ECB could start buying sovereign bonds — a large, liquid market where it could potentially make a major impact.

But central bank money printing to buy sovereign bonds - known as quantitative easing (QE) - is anathema to Germany’s Bundesbank, whose president Jens Weidmann worries it would fall into the realm of financing governments.

“We are making our lives extremely complex because of this theological discussion about whether we can do QE or not,” the second source said. “Mario Draghi is trying to steer a middle way to keep the council together.”

Asked whether there already was a clear majority for QE if necessary, he said: “There is likely to be a majority for QE but it will not be a generous majority. The Germans will not be alone. This is not all about Weidmann.”

ECB Executive Board member Sabine Lautenschlaeger, a former Bundesbanker, said on Sunday she believed some unconventional policy measures such as sovereign bond purchases should only be used as a last resort to fight deflation.

A third ECB source said January’s Governing Council meeting could provide an opportunity for the ECB to signal a readiness to go beyond its current debt-buying programme.

The central bank will first wait to assess the take-up of its second TLTRO offer in December, as well as monitoring the impact of the ABS and covered bond buys, and waiting for updated ECB staff forecasts in December.

“That basically means no decision before January unless the growth and inflation numbers really turn bad before then,” the second source said of the next decision on stimulus.

Editing by Catherine Evans

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