The euro fell briefly below the level where it first traded against the dollar 16 years ago, as reports leaked out confirming that the European Central Bank is considering a large-scale program of government bond-buying.
By lunchtime in Europe, the euro was trading close to yet another new nine-year low at $1.1791. After a tricky first couple of years in which it struggled to win the confidence of international markets, the single currency has never traded below its opening level of $1.1789 on Jan 4, 1999.
Bloomberg reported earlier that ECB governors had considered a plan at a council meeting Thursday under which it would buy up to €500 billion of government bonds in an effort to stimulate the Eurozone economy by pushing down long-term interest rates, the way the Federal Reserve, Bank of England and Bank of Japan have over recent years.
The council is likely to take some kind of decision in two weeks’ time, when it next meets.
The report had a relatively muted effect on financial markets, as the €500 billion number was at the low end of the range of market guesses (it’s barely any more than the Bank of England bought to support an economy a quarter the size of the Eurozone’s).
Speculation on “ECB QE” that has become increasingly intense since the start of the year. The Eurozone’s headline annual rate of inflation turned negative for the first time in over five years in December, and even though that was mainly due to the sharp fall in global oil prices-something outside the Eurozone’s control–it added to fears that the region is sliding into a deflationary spiral.
The December CPI number may not in itself represent deflation, but the Eurozone still seems too weak to recover without further action of some sort: industrial output in both France and Germany worsened again in November, according to figures released Friday.
ECB President Mario Draghi reiterated in a letter to European lawmakers Tuesday that the bank is considering additional measures to stop the Eurozone falling into such a spiral, saying that: “Such measures may entail the purchase of a variety of assets ‒ one of which could be sovereign bonds.” He’s been making that point since a speech in late November.
There’s more than just a little irony in this. The ECB has actually spent the last six years explaining why such ‘quantitative easing’ projects wouldn’t work in the Eurozone. It has masked the real reason–the fear of offending Germany by buying up the debts of weaker sovereigns like Italy–with arguments of varying conviction.
The strongest of these, advanced repeatedly by Draghi himself, has been that banks, rather than markets, are the biggest source of finance to Eurozone businesses, and an ECB bond-buying binge won’t change the fact that many banks haven’t got enough capital to risk making new loans. (Even a bank like Banco Santander SA (SAN), which sailed through last year’s stress tests, still found it necessary to raise €7.5 billion in a capital increase Friday).
One interesting angle of the Bloomberg report was that the ECB only considered buying ‘investment grade’ government bonds. That would exclude those of Greece and Cyprus, which are both rated junk by all the major ratings agencies. As such, the plan insulates the ECB from the risk of default by a new left-wing government in Greece, something that should in theory make it easier for noted hawks like the Deutsche Bundesbank’s Jens Weidmann to agree to the plan.
The ECB’s next policy-setting council meeting is set for Jan. 22.–three days before Greece’s parliamentary elections.
Learn more about the ECB from Fortune’s video team: