Think Tank Sees Workaround for ECB Bond Buys
A top European economic think tank has unveiled its “shopping list” for a potential large-scale asset purchase program from the European Central Bank.
Here’s the rationale from Brussels-based Bruegel: “Low inflation in the euro area is particularly dangerous, given high private and public debt levels in several euro-area countries and the need for relative price adjustment between the euro-area core and periphery,” Gregory Claeys, Zsolt Darvas, Silvia Merler and Guntram Wolff wrote.
Euro zone inflation was 0.7% in April and has been below 1% for many months. That’s far below the ECB’s target of just under 2%. The ECB has already done a lot of easing to keep inflation from falling too low. Its key interest rate is 0.25%, a record low. It has pumped over one trillion euros ($1.4 trillion) in long-term loans into euro zone banks. It has pledged to buy open-ended amounts of government bonds, if needed, to keep the euro together under a bond program created in September 2012 that hasn’t been used yet. It is widely expected to keep policy unchanged when it meets Thursday, though many economists expect additional stimulus later this year.
The ECB has largely refrained from major purchases of private and public debt as other central banks such as the Federal Reserve and Bank of Japan have done (though the ECB has made limited purchases of both). Doing more is complicated in the euro zone, which has 18 different government and private bond markets, and the ECB is prohibited from doing anything that smacks of bailing out struggling governments.
Bruegel has a way around that. It recommends that the ECB buy, for starters, EUR35 billion per month in bonds of European institutions such as the European Stability Mechanism and European Investment Bank, corporate debt and asset-backed securities. That’s in line with what the Fed did under QE3, Bruegel notes.
“A natural starting point for an ECB asset-purchase program would be euro-area wide government bonds, which do not exist. The closest existing asset, which could be bought without creating too many distortions, would be bonds issued by the EFSF and the ESM,” the authors wrote, referring to Europe’s bailout funds. EU and EIB bonds are also options, they said, and the total pool of these bonds is just under EUR500 billion.
The authors don’t recommend buying bonds issued by individual euro-member governments....MORE
