There is no doubt that the ECB will go ahead with a so-called quantitative easing (QE) programme and will announce this after the meeting of its central council. The programme will involve the ECB buying bonds issued by governments and by official institutions such as the European Investment Bank. Here are the key things to look out for:
1. The size of the programme
When it comes to QE, you are talking about telephone numbers. The signals are that the ECB will buy about €50 billion in bonds each month for at least a year and possibly up to two years.
This would be a minimum of €600 billion if the purchases continued for one year and possibly well over €1 trillion if it goes on for a longer period.
These purchases would be made from investors, giving them cash which the ECB hopes would be invested or loaned out elsewhere. The goal would also be to lower the value of the euro, increasing import prices and inflation and helping exporters.
2. What exactly is being bought and when?
Given the arguments in the run-up to the announcement, it is not clear what level of detail we will get on Thursday in terms of exactly what bonds will be bought, for how long they will be held, and when the transactions will take place. The speculation has been that bonds would be bought roughly by reference to the size of the countries (the ECB has a so-called “capital key” measuring the responsibility of member states, weighted by size, which may be used as a guide).
3. Who will do the buying?
There has been speculation that to appease German-led concerns about the ECB taking all the bonds on to its balance sheet, the national central banks might do some or all of the buying. The Germans fear that if the ECB buys bonds of countries with deficits, it will limit the pressure on them to correct their finances and could expose the German taxpayer – the biggest “ shareholder” in the ECB – to losses in the event of a default. There are strong arguments that, in fact, national central banks buying the bonds would not, in reality, expose the national government to default risk.
However perception is also an issue here for the ECB. What ECB president Mario Draghi says about this area of “risk sharing” will be watched closely.
4. Will the ECB council unanimously support the plan?
It has been suggested that the two German members of the ECB council may not support the programme, despite it being tweaked to address German concerns. There is a danger if this casts doubt on the ECB’s ability to push ahead with the programme, or to increase it in amount or duration if needed.
5.Will Irish bonds be part of the programme?
If Irish bonds were to be purchased in line with our economic size, it would imply purchases of about €500 million a month for a period (roughly 1 per cent of the total), helping to keep bond rates low. The Central Bank already holds €25 billion of Irish Government bonds after the unwinding of the Anglo promissory note deal and it is not clear if the ECB will set limits on the size of total permitted central bank holdings as a percentage of the total. About €116 billion of Irish bonds are in issue at the moment. If the Central Bank bought the bonds it would have a small positive impact on the annual budget, as interest paid to the Central Bank on the bonds would eventually return to the exchequer and the cost of raising new funds would be a bit lower than it would otherwise have been.
However the bigger economic impact for the State would come if the programme succeeded in weakening the euro and boosting euro zone growth, helping exporters.A boost to the inflation rate would also be welcome.
