ECB chief economist Peter Praet’s weekend musings about quantitative easing haven’t taken the wind out of the euro’s sail but they’ve left economists struggling to wonder what Draghi & Co could be up to.
The WSJ mulls potential bond purchases but buying the debt of 17 nations struggling to reform is a bad idea.
They say purchasing private-sector credit assets from the banking system might prove a better bet but that could also be fraught with issues. The best bet:
One suggestion is that the ECB buy securitizations from banks. It could have economic benefits: ECB executive board member Yves Mersch spoke powerfully last week of the need to revive securitization in Europe, to help spur lending. But that will require regulators and politicians to ease up on rules that make securitization costly and difficult. That will be a challenge given securitization’s bad reputation.
The ECB also needs to decide what to aim for under quantitative easing. The Fed’s QE is now explicitly linked to reducing unemployment, but for the ECB, with its sole mandate to target inflation, this would be difficult. Credit flows could be an acceptable target, in that they can be linked to inflationary forces. If lending continues to decline, that could tip the ECB’s hand.
The question is particularly pertinent for bond fund managers but if any of these options are undertaken, they would also be a boom for European bank stocks.
As for FX? QE in Europe is still seen as a low probability outcome but it would severely hurt the euro.