European Central Bank officials are considering ways to ensure weak countries that stand to gain most from a fresh round of money printing bear more of the risk and cost.
Officials, who spoke on condition of anonymity, have told Reuters that the ECB could require central banks in countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying, reflecting the riskiness of their bonds. Such a move could help persuade a reluctant Germany to back plans to buy state bonds. There is currently a stand off between the ECB and Germany’s Bundesbank over ECB preparations to buy sovereign bonds, so-called quantitative easing (QE), to shore up the flagging eurozone economy.
But while the idea may help overcome opposition in Germany, which is worried that fresh money printing could encourage reckless spending and leave it to pick up the tab, critics will argue that any such conditions curtail its scope and impact. Although a release of new money to buy state bonds appears all but certain, how it will happen remains fluid. The ECB’s Governing Council holds its next monetary policy meeting on January 22, with market expectations high for fresh stimulus. Requiring weaker countries to set aside extra provisions would signal that more of the risk of potential losses would rest with national central banks, rather than the ECB in Frankfurt. “Losses are taken ... by the nation states,” said one official.
The ECB declined to comment.
The ECB could require central banks in countries such as Greece or Portugal to set aside extra money
The national central banks would most likely be the ones tasked with buying their country’s bonds, as part of a wider ECB programme.
While easing the burden on countries like Germany whose bonds are highly rated, the ECB could place a heavier burden on more risky countries such as Greece, requiring them to set aside more money in order for the ECB to buy their debt.
It now costs roughly €1.1 million to insure €10 million of Greek bonds against default, for example, making it roughly half as risky as war-torn Ukraine. If Greece’s central bank also had to set aside more to cover the risks of its bonds, that could curb the dividend it pays the Athens government or possibly even require an injection of capital.
Lobbying by the small group of countries opposed to fresh money printing is now gradually shifting towards changing the shape of quantitative easing rather than try to block it altogether.
The Bundesbank is demanding that any new round of bond buying be subject to strict limitations. Its president, Jens Weidmann, this week outlined two such possibilities – restricting ECB buys to bonds of countries with a top-notch credit rating or allowing each central bank to buy their country’s bonds at their own risk.
“Even if you say it’s not too early for QE, there is still something to be said about how you set it up,” said one eurozone central bank official. Similar provisions, where the risk of some loans taken as security for credit rests with a national central bank, already exist, officials said.
The suggestion of such pre-conditions underlines the deep divisions over fresh money printing in Europe.