Constancio on ECB Sovereign QE

November 26th, 2014 7:33 am | by John Jansen |

Via Bloomberg:

ECB May Consider Sovereign QE Next Quarter, Constancio Says

The European Central Bank will next quarter consider buying sovereign debt in relation to the size of each euro member’s economy if current stimulus proves insufficient, Vice President Vitor Constancio said.

“We expect that the adopted measures will lead, within the time of the program, the balance sheet to go back to the size it had in early 2012,” Constancio said in a speech in London today. “If not, we will have to consider buying other assets, including sovereign bonds in the secondary market, the bulkier and more liquid market of securities available. It would be a pure monetary policy decision, buying accordingly to our capital key, within our mandate and our legal competence.”

The comments underline the ECB’s desire to be ready to add more stimulus if needed, with President Mario Draghi last week vowing to revive inflation “as fast as possible.” Even so, Constancio reflects a growing consensus on the need to wait to see the impact of existing measures, with Executive Board member Benoit Coeure saying in an interview this week that policy makers “won’t rush” to any decision.

“They think the measures that they’ve put in place are just about good enough — if not, they’ll reassess,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Given that they’ve just now kicked off this asset-backed securities program, it’s perfectly reasonable to see how much it moves the market and how it goes. The idea of delaying quantitative easing until next year makes sense.”

Germany Target

ECB expert committees have been tasked with examining further measures to help boost the region’s near-stagnant economy, even after programs buying up covered bonds and ABS started this year.

Should the ECB buy sovereign debt, using the capital key would mean German bunds would be the top target. The euro area’s largest economy paid in just under 18 percent of the central bank’s capital. France accounts for 14 percent, Italy 12 percent and Spain 9 percent.

Officials have pointed to a second round of long-term, targeted bank loans in December as a key gauge. The results of the so-called TLTRO won’t be known until a week after the ECB’s Dec. 4 monetary-policy meeting. The first round in September saw banks borrow 82.6 billion euros ($103 billion), below economists’ forecasts.

Legal Hurdles

“To explore new channels of transmission of monetary policy that have worked in other countries like the U.K. and the U.S., we are aiming at increasing the size of the monetary base and our balance sheet by directly injecting money also into non-bank economic agents,” Constancio said. The impact of buying sovereign debt would go “well beyond the direct effect on the yields of the purchased securities,” he said.

The ECB’s Governing Council, on which the central-bank governors of the euro region’s 18 nations sit, isn’t united on either the need for further stimulus or the design of purchases. Bundesbank President Jens Weidmann said on Nov. 24 that there are “high legal hurdles” to purchasing government debt.

Constancio sought to dispel some of the arguments against large-scale sovereign bond-buying in the euro area, saying the argument that such intervention is pointless because yields on government debt are already low “is not well founded.”

Rates on bonds from Austria to Spain reached record lows today. Spanish (GSPG10YR) 10-year government debt has a yield of about 1.93 percent, compared with 2.26 percent for equivalent U.S. bonds.

“Even less valid is the argument that sovereign-bond purchases, should these be deemed necessary, would ease the pressure on governments to do structural reforms,” Constancio said. “It is not the task of a central bank to exert more or less pressure on governments to adopt policies for which they are respons

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