Draghi Push Seen Delivering $635 Billion With QE Forecast

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Mario Draghi is likely to announce a 550 billion-euro ($640 billion) bond-purchase program this week and won’t skimp too much on the details, economists say.

The European Central Bank president will make his biggest push yet to steer the euro area away from deflation by announcing quantitative easing on Jan. 22, according to 93 percent of respondents in a Bloomberg News survey. The median estimate of the size of the package tops the 500 billion euros in models presented to officials this month.

Draghi’s goal at a press conference after the Governing Council gathers will be to convince investors he has a strategy big and bold enough to reinvigorate the moribund economy. Speculation over his plans has already sent the euro to an 11-year low, with the fund flows probably contributing to the Swiss National Bank’s shock decision to end a cap on the franc.

“Market expectations now are stellar,” said Attilio Bertini, head of research at Credito Valtellinese SC in Sondrio, Italy. There must be “no disappointment” and “the ECB’s next move should be pervasive, risk-transferring and long-lasting,” he said.

The proportion of economists predicting QE at this week’s meeting has risen from 37 percent in a survey carried out after the last monetary-policy meeting on Dec. 4. This month’s survey polled 60 economists and was conducted from Jan. 9 to Jan. 16.

German Criticism

With plunging oil prices tipping the euro-area inflation rate below zero for the first time in more than five years, policy makers have been arguing in media interviews and speeches over how to react. Much of that has been in Germany, where criticism of QE is strongest.

Bundesbank president Jens Weidmann has claimed that while cheaper energy weighs on inflation in the short term, it also provides stimulus to the economy. That position was reiterated by the German central bank in its monthly bulletin today. Executive Board member Benoit Coeure says it might not be enough.

“Anything that happens to headline inflation rates has potential to feed into long-term inflation expectations and that’s what we have to be wary of,” Coeure said in comments published on the ECB’s website last week. While no decision has been taken on QE, “for it to be efficient it would have to be big,” he said.

Sovereign Bonds

About half of economists in the Bloomberg survey forecast the ECB will announce a total purchase size, and 15 percent said it’ll limit itself to a monthly amount. Monthly buying could continue for a predetermined period, or until inflation is back at the ECB’s goal of just under 2 percent. Consumer prices fell an annual 0.2 percent last month.

Fifty-seven percent of respondents said QE will largely focus on government bonds, with some other debt instruments included. A quarter predicted a broad mix of sovereign debt and other securities, and 14 percent said the program will exclusively purchase sovereigns.

Draghi intends to expand the ECB’s balance sheet to as much as 3 trillion euros through asset purchases and loans to banks. The central bank currently has assets of 2.2 trillion euros, though that’s likely to shrink in coming weeks as 200 billion euros of crisis-era loans to banks mature.

He met with German Chancellor Angela Merkel on Jan. 14 for “regular informal talks,” a German government spokesman said last week, declining to comment on the topic. Spiegel magazine reported on Jan. 16 that Draghi told her the latest QE plans.

Risk Allocation

Those plans include limiting risk-sharing by having national central banks buy the debt of their own countries, Spiegel said, without stating where it got the information. Purchases would be based on the ECB’s capital key, or roughly equivalent to the relative size of each economy. The key is 18 percent for Germany, 14 percent for France, 12 percent for Italy, and 9 percent for Spain. All other nations are below 5 percent and eight are under 1 percent.

Purchases would be limited to 20 percent to 25 percent of each country’s debt, and Greece would be excluded because its bonds don’t meet quality criteria, Spiegel said.

Frankfurter Allgemeine Sonntagszeitung reported yesterday that national central banks would be liable for at least half of any losses that may arise from buying bonds issued by their own country. The German newspaper didn’t say where it got the information.

No Back Door

More than two-thirds of respondents in the Bloomberg survey said the ECB will use the capital key to set asset-buying, and 27 percent said national central banks will shoulder at least some of the risk on their own.

“To have any significant effect on periphery bond rates, which we think is considered an important implicit policy target by the ECB, the program would have to include periphery government bonds,” said Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany.

Officials have also floated ideas such as the ECB buying debt only above a certain rating threshold or only making purchases up to a certain amount, leaving national central banks to decide if they want to go further.

Dutch central-bank Governor Klaas Knot told Spiegel that the decision to share risk is a matter for elected politicians, not central bankers.

“We have to avoid that decisions are taken through the back door of the ECB balance sheet,” he said in an interview.

Legal Opinion

That debate is colored by a European Court of Justice opinion last week on an earlier bond-buying plan, Outright Monetary Transactions. The non-binding opinion, which will be followed by a ruling in four to six months, said the ECB should have “broad discretion” when framing monetary policy, while still pointing to limits to its powers.

Ultimately, some level of risk separation might be what it takes to mute the strongest opponents of QE at this week’s meeting and help Draghi show investors that the Governing Council is committed to its task.

“There’s already a majority in favor of QE and even purchases of government bonds,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “But the ECB stands in a tradition of broad consensus.”

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