Mario Draghi could end the search for an asset worth buying if he’d only turn to the euro area’s jointly issued crisis bonds.
That’s the analysis of Guntram Wolff, director of the Bruegel institute in Brussels, who is a frequent contributor to closed-door meetings of euro-area finance ministers. He proposes that the European Central Bank president tap a 490-billion-euro ($669 billion) pool of debt issued by agencies that include the region’s two bailout funds.
ECB officials faced with a stumbling economy and inflation stuck at less than half their goal have floated the idea of adding stimulus via asset purchases, akin to quantitative easing, only to be confronted with a shortage of suitable instruments. The complexity presented by 18 government debt markets means Draghi is instead priming investors for more limited action such as interest-rate cuts for now.
Debt issued by the bailout funds represents “the only ‘European sovereign bonds,’ if you wish; they’d be European assets which have European quality, and therefore would be of low risk,” Wolff said in an interview in Berlin yesterday. “My feeling is that the ECB is still very shy. The easy thing will be to lower the deposit rate. We all know the effect of this is not very big.”
Bruegel is a European economics research institution established in 2005 and currently chaired by former ECB President Jean-Claude Trichet, according to its website. It is funded by a mix of private and public-sector subscriptions.
Euro-area figures yesterday showed gross domestic product expanded just 0.2 percent last quarter, half as much as economists predicted, with France unexpectedly stagnating and economies from Italy to the Netherlands shrinking. Inflation has been below 1 percent since October, compared with the ECB’s goal of just under 2 percent.
Draghi said last week that officials are “comfortable” with acting at their next monetary policy meeting, and ECB Executive Board member Yves Mersch said yesterday that policy makers are working on a broader range of instruments that “might even strike the most fertile imagination.”
Any measure is unlikely to resemble the QE programs deployed by the U.S. and U.K., where central banks have bought swathes of domestic public debt to boost prices, according to Wolff. The ECB would have to deal with the politics and practicalities of intervening in so many different markets.
“There’s no way you can avoid that,” Wolff said. “It’s always a political debate, and that’s why my sense is that they’ll probably shy away from government bonds because government bonds are even more political than others.”
Debt traded on secondary markets issued by the European Financial Stability Facility and the European Stability Mechanism, which since 2010 have lent cash to crisis states such as Greece, Ireland and Portugal, provide a simpler alternative, he said. The bonds are backed by guarantees from the euro-area governments.
Portugal, which requested a 78 billion euro rescue package in 2011, will exit its bailout program tomorrow. Ireland and Spain left their programs in the past six months.
Including debt issued by the European Commission and the European Investment Bank, the ECB would have access to at least 490 billion euros of suitable assets, according to a paper published by the Bruegel institute this month.
The institute recommends the ECB should spend 35 billion euros a month, with a review after three months, and should also tap the private markets for corporate bonds and asset-backed securities. Draghi has in the past described the ABS market as “dead.”
The ECB’s 24-member Governing Council will release revised macroeconomic forecasts at its meeting on June 5 in Frankfurt. That’ll help it decide whether the medium-term outlook for prices is worsening, a contingency which Draghi said last month would justify broad-based asset purchases. Wolff expects a different response.
“The ECB is a very conservative institution,” he said. “I think we’ll start with the interest rate and the deposit rate, and then we’ll see how it goes. They could start only in September or October with something more serious.”