ECB considers making weaker euro zone states bear more quantitative easing risk - sources

19/12/2014

By John O'Donnell and Paul Carrel

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 euro zone 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 Jan. 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 national central banks would most likely be the ones tasked with buying their country's bonds, as part of a wider ECB program.

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 euros ($1.35 million) to insure 10 million euros 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.

CHANGING SHAPE

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 euro zone central bank official.

"If the central bank would only buy bonds from its own country, then the chances and risks would go to that central bank. What happens if there is a loss? It would be good if the central banks have made adequate provisions."

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.

But while setting such a precondition for any resulting losses would help win over Germany, it threatens to further undermine the notion that all 18 countries of the euro bloc are on an equal footing.

($1 = 0.8137 euros)

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