ECB may decide on sovereign bond buys in first-quarter, says Constancio
By Marc Jones
LONDON (Reuters) - The European Central Bank might decide as early as the first quarter of next year whether to begin buying sovereign bonds, the bank's vice president said on Wednesday.
Vitor Constancio said the ECB could better gauge then whether sovereign bond purchases - so-called quantitative easing - are needed to provide enough stimulus to support the euro zone economy and stave off deflation.
The ECB is already buying covered bonds and bundled loans known as asset-backed securities. It wants to increase the size of its balance sheet to the levels of early 2012 - around 1 trillion euros (0.79 trillion pounds) higher than it is today.
"We have, of course, to closely monitor if the pace of its evolution is in line with that expectation," Constancio said. "In particular, during the first quarter of next year we will be able to gauge better if that is the case."
"If not, we will have to consider buying other assets, including sovereign bonds in the secondary market, the bulkier and more liquid market of securities available," he said, according to the text of a speech delivered in London.
The euro dipped to the day's low and shares and the bloc's bonds rose after Constancio's comments.
"This speech certainly increases the chances that we could see sovereign bond purchases in Q1," said Berenberg bank economist Christian Schulz. "Markets might be disappointed and economic confidence might take a hit if the ECB doesn't deliver."
ECB President Mario Draghi had already opened the door to buying sovereign bonds, when he said last Friday the bank could "broaden even more the channels through which we intervene".
But Constancio's comments are the clearest indication yet from an ECB policymaker on the timing of any quantitative easing, which financial markets see as the central bank's best shot at stimulating the flagging economy.
"It would be a pure monetary policy decision, buying accordingly to our capital key, within our mandate and our legal competence," he said.
The reference to the 'capital key' means the ECB would buy government bonds broadly in proportion to the size of the euro zone's 18 economies.
That would mean roughly 18 percent of any money spent would go on German Bunds, 14 percent on French bonds and 12 and 8 percent on Italian and Spanish paper.
"SERIOUS RISKS"
Other major central banks, including the U.S. Federal Reserve, have already used QE programmes, but the concept is highly controversial in the euro zone. Germany's Bundesbank in particular resists the idea.
Bundesbank chief Jens Weidmann has argued that QE would take the ECB close to monetary financing of governments, and that would risk the ECB being driven by fiscal policy. Some critics also question whether buying the bonds, which would push down yields, would be helpful since borrowing costs are already low.
Constancio dismissed that argument.
"The transmission goes well beyond the direct effect on the yields of the purchased securities," he said.
"The transmission channels involved include signalling and influencing inflation expectations, exploring spillovers resulting from investors using the cash received to buy other assets, including foreign assets with influence on the exchange rate, and finally, the freeing up of space in banks’ balance sheets to increase credit to the real economy."
German opposition to such a move would be awkward for the ECB but unlikely to prevent it. The Bundesbank opposed both ECB purchases of Greek, Portuguese, Irish, Italian and Spanish bonds during the euro zone debt crisis and Mario Draghi's Outright Monetary Transmission plan, which ultimately calmed the turmoil.
On both occasions, the decisions were pushed through by a "comfortable majority" in the bank. The weak economy could mean QE ends the same way.
Euro zone inflation is running at 0.4 percent - far below the ECB's target of just under 2 percent - and Constancio said it "threatens to continue on the low side for some time to come."
"The environment of low nominal growth now prevailing creates serious risks to the social and economic fabric of the euro area," he added.
(Reporting by Marc Jones; Writing by Paul Carrel; Editing by Larry King; editing by Thomas Atkins)
