Draghi Seen Bypassing QE Qualms to Hit Balance-Sheet Goal

By Jeff Black and Joshua Robinson  

Photographer: Pete Marovich/Bloomberg

Mario Draghi, President of the European Central Bank, speaks at the Brookings... Read More

Mario Draghi will succeed in boosting the European Central Bank’s balance sheet back toward 3 trillion euros ($3.75 trillion), though he’ll have to override some policy makers’ qualms on quantitative easing to do so.
That’s the majority view of economists in Bloomberg’s monthly survey, who have become more optimistic that the ECB president will meet his goal. Most predicted he’ll have to buy more than covered bonds and asset-backed securities though, and 72 percent said any stimulus expansion will be against the wishes of some national central-bank governors.
Draghi, who has faced opposition to his most-recent measures, addresses the
European Parliament at 3 p.m. in Brussels today. He’ll probably reiterate his pledge to be ready with further steps should the outlook for the economy worsen, and 95 percent of respondents in the survey said he’ll act on that promise either this year or in 2015.
“If private-sector asset purchases are insufficient then sovereign bonds will then likely be included,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “This will be a hard sell internally.”

Negative Balance

Resistance to Draghi’s recent loosening of policy has come primarily from Germany. Bundesbank President Jens Weidmann has repeatedly warned of the risks of large-scale asset purchases, known as quantitative easing, and Executive Board member Sabine Lautenschlaeger has said the balance between cost and benefit for some non-standard tools is currently negative. Austria’s Ewald Nowotny joined Weidmann in opposing the ABS plan.
That didn’t stop a fresh reference by Draghi on Nov. 6 to driving the balance sheet back toward its March 2012 level via asset purchases and targeted loans to banks. Sixty percent of the economists surveyed said he’ll succeed, which implies that close to 1 trillion euros of assets will be added. In last month’s survey just 39 percent said he’ll achieve his aim.
The ECB will expand its balance sheet by about 550 billion euros by the end of next year, and about 850 billion euros by the end of 2016, according to the median of economists’ estimates.
Officials started buying covered bonds last month, and Executive Board member Benoit Coeure said last week that purchases so far have been about 11 billion euros. Board member Yves Mersch said today that the ECB will start buying asset-backed securities this week.

Corporate Bonds

In order to reach its goal, the ECB will need to extend its program, the survey shows. About 21 percent of respondents said it’ll announce a larger program after its December monetary-policy meeting, and almost three-quarters said stimulus will be expanded in 2015.
More than three-quarters of economists said that if the ECB does enlarge the program, it will buy corporate bonds; 43 percent said it will buy the debt of government agencies; and 57 percent predicted it will buy sovereign bonds. More than a fifth said it will add stimulus by making the targeted bank loans more attractive.
French central bank governor Christian Noyer said on Nov. 14 that the ECB could buy state or company debt if it decided that its policies weren’t having enough impact. Mersch said today that a QE program could “theoretically” include sovereign debt, gold, exchange-traded funds and real estate. Even so, he warned against rushing in too fast.

Forecast Trigger

“Unconventional monetary-policy measures can have also unintended side effects in the medium and long term if we use them too aggressively or too extensively,” he said at a conference in Frankfurt. “Every possible new measure must therefore be thoroughly screened for effectiveness, efficiency and conformity with our mandate.”
The euro-area economy hasn’t fallen off a cliff yet. Output in the region grew faster than analysts forecast in the third quarter as Germany and France rebounded, according to data released on Nov. 14. Greece ended its worst recession in more than half a century.
The presentation of fresh ECB economic projections next month could be the trigger for further action. More than 90 percent of economists in the survey said growth and inflation forecasts will be revised lower. Annual consumer-price gains in the euro area were 0.4 percent in October, well below the ECB’s goal of just under 2 percent.
Alternatively, the forecasts may provide a reason for the ECB to hold off increased stimulus for now as the longer-term outlook has the characteristic of a policy target, according to Kristian Toedtmann, an economist at DekaBank in Frankfurt.
“The more the ECB revises down its projections for 2016, the more it signals that there is a need for more policy easing,” he said. Small revisions would “enable the ECB to communicate that the economic recovery and the acceleration of inflation are only delayed, not called off,” he said.