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 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
program 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 program and in case of default the risk would be shared among
national central banks depending on their capital share.
The remaining part of the program'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.
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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 program, though stressed that calculations were still
underway to determine how large the program 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 program.
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
program. 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)
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