The consensus that sovereign quantitative easing is on the way is so strong that sovereign, supranational and agency bankers this week have been saying that the periphery will sell off if the ECB press conference on Thursday produces anything short of a heavy-handed hint. Investors have been snapping up anything that is set to tighten once ECB president Mario Draghi puts his hand in his pocket, expecting a one-way trade. Nothing has been promised, but disappointment still means dumping bonds.
But the ECB won’t — and shouldn’t — bow to threats of volatility. Politically speaking, it has to hold up sovereign QE as the final option in a round of measures aimed at boosting inflation.
In late November, the ECB’s vice president Vitor Constancio mentioned sovereign bond buying as among its possibilities in 2015, boosting the hopes of those that want all-out QE. Knowing how savvy this institution is at making every one of its pronouncements count it is difficult to imagine that it would even mention the word ‘sovereign bonds’ at a press conference in this time of heightened expectation, without being prepared to follow through with a buying programme.
But just because they have mentioned the magic word doesn’t mean that it is imminent, or even a certainty.
European inflation expectations are disappointing, despite the central bank's efforts so far, making it more and more likely that the ECB will have to start buying in the biggest market out there in a kitchen-sink effort to jump start the European economy.
But the ECB will no doubt be waiting to see how the take-up of the second round of targeted longer term debt operation is later this month, and hoping that demand is less anaemic than September’s round.
And it still has plenty of options before it pushes the nuclear button. The ECB has been heavily rumoured since October to be considering buying corporate bonds. And buying supranational or agency paper is another option.
It’s hard to imagine the naysayers in Germany allowing the buying of sovereign bonds unless every other option has been exhausted. One can only hope that the ECB’s other options are exhausted before the eurozone economy collapses into deflation.