European Central Bank staff presented policy makers with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets, according to a person who attended a meeting of the Governing Council.
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 minus, 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.”
The euro traded 0.2 percent higher at $1.1811 at 4:16 p.m. Frankfurt time. The yield on Spanish 10-year bonds climbed 5 basis points to 1.72 percent, and its Greek equivalent dropped to 10.1 percent.
Governing Council member Ardo Hansson said in an interview with Bloomberg News that the ECB should slow its rush toward fresh stimulus. Current measures haven’t had time to work and challenges including Greece’s political crisis make buying government bonds difficult, he said.
“You shouldn’t become overactive every few months when you don’t see the full effects” of previous measures, Hansson said in Frankfurt yesterday. “I’d personally find announcing a bond-buying program including Greek government bonds in January problematic.”
Greek bonds are currently rated junk at all three major rating companies. Elections on Jan. 25 could bring to power a party that wants to restructure the nation’s debt.
Exceptions for government debt rated below investment grade didn’t feature in the ECB staff presentation, though the treatment of such securities in previous programs was mentioned, one person said. The central bank currently grants Greek and Cypriot government bonds a waiver in its operations as long as the countries stay in a program that ensures their reform efforts stay on track.
“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.”
Executive Board member Benoit Coeure has signaled the ECB won’t let Greece delay any decision on QE. Euro-area consumer prices fell on an annual basis last month for the first time in more than five years and ECB President Mario Draghi has warned that the deflationary risks may demand a response.
The ECB 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 loans early this year.
While Hansson said any purchase program should focus on corporate bonds, the people at the staff presentation said the seminar centered on government debt. Program sizes below 500 billion euros were also considered, along with monthly targets, one of the officials said.
Governors were asked to not give their opinions on the options, both people said. Hansson’s skepticism is in line with opposition by a minority of officials including Bundesbank President Jens Weidmann, who has argued that sovereign-debt purchases involve unwarranted risks and undermine the incentive of governments to make economic reforms.
The final decision on QE will also be complicated by a European Court of Justice opinion on a previous government-bond purchase program due on Jan. 14.