Devil is in the detail of ECB’s plan for QE

Right through the euro crisis, the key measures taken involved compromise. Now it appears quantitative easing (QE) may be heading in the same direction.

Speculation is mounting that QE, which may be announced after the ECB council meeting next Thursday, will involve member states’ central banks buying the bonds of their own countries, rather than the ECB undertaking the move itself.

This may seem like a detail. The central banks are all arms of the ECB, of course, and the injection of cash to try to combat deflation would still go ahead. Prices are now falling across the euro zone – with falling oil costs making a big contribution – and the key goal of QE is to try to stop this deflation becoming entrenched.

However, if the national central banks buy government bonds – instead of the ECB – then the risk of losses if these bond prices fall will be on their individual balance sheets. This means national governments would, presumably, be ultimately responsible.

If the ECB took the bonds on to its own balance sheet and losses were incurred – losses requiring fresh capital – then the bigger member states would have to put up most of the cash.

Germany has reservations about QE because it has a general opposition to monetary expansions, but also because it fears it would involve the quasi-bailout of peripheral countries, potentially at its expense. If national central banks bought their own bonds, it would remove the latter objection, at least.

Der Spiegel says ECB president Mario Draghi (pictured) and German chancellor Angela Merkel discussed the plan last Wednesday. Dutch central bank governor Klaas Knot also favoured this approach.

The market reaction to QE in this format is uncertain, and it would certainly not be as powerful a signal as the ECB weighing in on its own behalf. Money is added via this plan, but risk remains in the member states.

The Central Bank here, meanwhile, already has some €25 billion of Irish government bonds on its balance sheet after the unwinding of the promissory note and is unlikely to want to buy more. Whether it will be obliged to do so is not clear. An interesting week lies ahead.