Mario Draghi has told bondholders the what and the why of the European Central Bank's quantitative-easing plan. He stopped short of telling them the how.
Investors do know that the bond-buying plan will begin in March and amount to 60 billion euros ($ 68 billion) a month, based on what the ECB president said at a news conference in Frankfurt on Thursday. It's intended to run until the end of September 2016 and purchases will be made until the ECB is satisfied inflation is back in line with its target.
What's still unclear is how it plans to do this.
"Not for the first time with the ECB, they've rushed out a program without having the finer details agreed," said Robin Marshall, London-based director of fixed income at Smith & Williamson Investment Management. "I haven't seen anything that convinces me we know the exact mechanics or that they've worked them out. Maybe we're going to get more before, or at, the next meeting in March."
The purchases will probably comprise about 45 billion euros of sovereign debt, 5 billion euros of bonds issued by European institutions and agencies, and 10 billion euros under existing programs for asset-backed securities and covered bonds, according to a euro-area central-bank official.
Traders also learned from Draghi that the ECB will buy debt due between two and 30 years and won't exclude those with sub-zero yields, while information on the central bank's website shows securities with payments linked to inflation or interest rates will also be eligible.
Deeper Dive
The ECB will carry out purchases in proportion to each euro-area country's contribution to the central bank's capital. Germany, for example, makes up about 25.6 percent of the so-called capital key, once nations outside the currency bloc are excluded from the calculation.
Buying will be limited to 25 percent of any single security, and 33 percent of the instruments available from one issuer. The central bank will publish a list of its purchases each week and holdings of the securities will be eligible for use in repurchase agreements.
The ECB will hold a share of the bonds while requiring individual central banks to conduct the purchases so that nations are incentivized to be more responsible for the management of their economies.
Defunct SMP
When the ECB previously bought sovereign debt under its now-defunct Securities Market Program, it dipped into the market on an unscheduled and unannounced basis. It's currently buying ABS and covered bonds on an ad hoc basis.
Under the Federal Reserve's quantitative-easing programs, the U.S. central bank gave advance notice of the date, time and securities to be purchased.
The Fed's balance sheet swelled to about $ 4.5 trillion in the course of three rounds of QE that started in November 2008. When the U.S. central bank first purchased Treasuries in 2009, it bought an average of $ 5 billion each day in about eight operations per full month. In its second round of quantitative easing, known as QE2, the Fed also used daily purchases, stepping them up to an average of 19 each month of around $ 5.5 billion, including the reinvestment of maturing securities.
In the Fed's final round, policy makers announced they would buy $ 40 billion a month of mortgage-backed securities starting September 2012 and added $ 45 billion of Treasuries starting the following January.
For the ECB, one answer lies beyond its control. While Draghi said that only investment-grade assets could be purchased, purchases of junk-rated bonds are still possible as long as the country is in a European-Union monitored program. That may include Greece from July, when redemptions of SMP bonds held by the ECB would enable it to purchase additional debt without exceeding the 33 percent issuer limit.
Greece holds elections on Jan. 25. The outcome may determine whether it's still under EU supervision when purchases become possible.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net; Eshe Nelson in London at enelson32@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins
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