Draghi’s $1.4 Trillion Question Lingers as ECB Mulls QE

08/04/2014 07:02 AST

When Mario Draghi flies to the U.S. this week, he’ll leave a 1 trillion-euro ($1.4 trillion) question mark hanging over Europe.

While the European Central Bank president and other ECB policy makers can use the International Monetary Fund meetings in Washington to reiterate their willingness to use quantitative easing, they may be unable to say much on its design. That suspense risks setting investors up for disappointment, according to economists at UniCredit SpA and Deutsche Bank AG.

Draghi can expect intense scrutiny of the policy option he divulged on April 3, with the pressure heightened by the revelation that the ECB has simulated an anti-deflation QE program deploying as much 1 trillion euros in bond purchases. Even so, Executive Board member Yves Mersch and Governing Council member Jens Weidmann signaled that there is plenty still to be discussed, and Governing Council member Ewald Nowotny indicated that purchases may focus on private securities rather than public debt.

“All this talk about QE has gotten markets rather excited,” Erik Nielsen of UniCredit wrote in a note yesterday. “I am sure the ECB -– like most of us -– is happy about this, but action is not imminent. What happens when markets realize that this was all just a semi-public discussion of the toolbox - – and not what will happen, unless we get an emergency?”

Multiple Models

Draghi may face questions on the matter at a press conference on April 12 as he attends the IMF spring meeting. Vice President Vitor Constancio will also fly to the U.S. this week, as will board members Peter Praet, the chief economist, and Benoit Coeure, the markets chief.

The ECB president’s comment last week that the Governing Council is “unanimous” on exploring tools including asset purchases prompted a surge in euro-area bonds, with Spain’s five-year note yields falling below U.S. equivalents for the first time since 2007. The Spanish yield was at 1.73 percent today, compared with 1.68 percent for the U.S. bond.

The ECB has run multiple QE models, a person with knowledge of the matter told Bloomberg News on April 4. Earlier that day, Frankfurter Allgemeine Zeitung reported that the institution tested buying about 80 billion euros a month over one year and found that it could boost inflation by between 0.2 percentage point and 0.8 percentage point. The newspaper also said officials are leaning toward a credit-enhancing program.

Bloomberg