In its usual 'leak the plans and judge market reactions' methodology, unnamed sources have released to Dutch newspaper Het Financieele Dagblad, three potential options that the ECB is considering for buying government bonds. As the Jan 22nd ECB meeting looms, Reuters reports [6] that while the ECB declined to comment, this 'strawman' appears very similar to comments made by ECB chief economists Peter Praet last week.
As fears grow that cheaper oil will tip the euro zone into deflation, speculation is rife that the ECB will unveil plans for mass purchases of euro zone government bonds with new money, a policy known as quantitative easing, as soon as this month.
According to the paper, one option officials are considering is to pump liquidity into the financial system by having the ECB itself buy government bonds in a quantity proportionate to the given member state's shareholding in the central bank.
A second option is for the ECB to buy only triple-A rated government bonds, driving their yields down to zero or into negative territory. The hope is that this would push investors into buying riskier sovereign and corporate debt.
The third option is similar to the first, but national central banks would do the buying, meaning that the risk would "in principle" remain with the country in question, the paper said.
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With German 5Y yields negative, and the entire curve at record lows, we can't help but wonder just how much 'bang' for the European taxpayers' buck any of these plans will have now that speculative capital has more than priced in Draghi's decision.
[7]
For now, the reaction is not positive...
[8]
As this is definitely a problem as if Draghi announces plans in principal on Jan 22nd, the market will not be happy. It is clear the ECB is not close to a decision...
