1. How big is it?
Draghi promised €60 billion of asset purchases per month, to continue “at least until September 2016”. As the program will start in March, that’s at least €1.14 trillion ($1.3 trillion), although the likelihood is that it will extend after September 2016. This year, it will be €600 billion, or just under 6% of Eurozone GDP.
2. What will the ECB be buying?
The new “Expanded Asset Purchase Program” will include the already-ongoing purchases of banks’ covered bonds and asset-backed securities (currently running at about €13 billion a month). It’s being expanded to include debt issued by Eurozone governments, as well as by European institutions such as the European Investment Bank and the Eurozone’s first bail-out vehicle, the European Financial Stabilization Facility. It won’t be buying corporate bonds. Purchases will stretch all along the maturity spectrum, from two years to 30 years. (Read more here.)
3. Wow. I thought it was forbidden from doing that?
You, the Bundesbank and most of Germany, buddy. Still, the same E.U. Treaty that prohibits the ECB from financing governments also allows it complete independence in conducting monetary policy. The interpretation of what is allowed and what not has shifted as the threat of deflation has increased.
4. So are the Germans on board? Or will they sabotage it?
Bundesbank President Jens Weidmann will probably, at some stage, complain loudly. He may even accompany the same old coalition of conservative academics and fringe politicians to the courts in an effort to stop it. But Chancellor Angela Merkel, who undercut the Bundesbank the last time the ECB tried anything this radical, had almost certainly been briefed about the program and she didn’t say anything too harsh about it in a speech at Davos Thursday. German exporters will be delighted. The DAX hit an all-time high after the announcement, because the euro’s now at a 12-year low against the dollar.
5. Has the ECB made any concessions to German fears?
A few. Normally, any losses on assets held by the Eurosystem (that’s the Frankfurt-based ECB AND the 19 National Central Banks) is distributed according to its capital structure. But with the new program, the NCBs will bear the risk for most of what they buy, and risks will only be shared regarding the purchases of E.U. institutions, which will account for a mere 12% of the total. Don’t expect the Bundesbank to be loading up on Italian or Portuguese debt.
5. Why is risk-sharing important?
Because it looks like the ECB is making a contingency plan for the Eurozone breaking up, and Draghi has spent the last two years trying to convince everyone that that’s impossible. Draghi got quite bad-tempered about the way journalists came back to that issue, which suggests that he lost the argument in the council.
6. Will they be buying Greek debt?
Not to start with. Of course, there are nooooo special rules for Greece. It’s just that there are, er, certain ‘technical’ limits to the program.
7. Huh?
The ECB won’t buy more than 25% of any bond issue, or 33% of the marketable debt of any issuer. Now, the ECB already owns a ton of Greek government debt from its first, ill-fated bond-buying program in 2010. There’s very little left in bonds in public hands as most of Greece’s debt is now in the form of IMF/EFSF loans. So, the ECB will wait till its Greek debt matures in July before buying any new stuff. In this way, it will be spared the embarrassment of buying Greek debt while the messy process of negotiations between the new Greek government (likely to be led by the radical left-wing Syriza party) and the Eurozone is going on over writing off some of the country’s debts.
8. Isn’t that blackmailing Greece?
Heavens, no! What strange ideas you have sometimes…No, the blackmail– sorry, ‘pressure on the new government’–will come through week-by-week decisions on whether to let Greek banks carry on borrowing from the ECB. That’s less a Sword of Damocles than a nuclear bomb on a hair trigger hanging over Athens.
8. OK, I get it. So – will it work?
Even Draghi said that QE won’t work on its own. It’s a powerful instrument, but it needs the rest of Eurozone policy to be pulling in the same direction for it to have the maximum effect. That means more government spending by those who can afford it (Germany), and more structural reforms to make people employable (Italy, France). The trouble is, that’s the logic that has driven every ECB stimulus action since 2010.
As UBS chairman Axel Weber told Davos yesterday, “If you’re continually buying time and that time isn’t used for reforms, then you have to ask whether more of the same is the best recipe, or whether you should change the medication.” But he might also have said the same about German fiscal policy, which remains as obstinately attached to running a balanced budget as ever.
