The European Central Bank should slow its rush toward fresh stimulus as current measures haven’t had time to work and challenges including Greece’s political crisis make buying government bonds difficult, Governing Council member Ardo Hansson said.
“You shouldn’t become overactive every few months when you don’t see the full effects” of measures, Hansson said in an interview in Frankfurt on Thursday. “I’d personally find announcing a bond-buying program including Greek government bonds in January problematic.”
Hansson’s skepticism on quantitative easing ahead of the ECB’s Jan. 22 policy meeting lines him up with officials including Germany’s Jens Weidmann who say QE could incur unwarranted risks. While President Mario Draghi says the threat of a deflationary spiral warrants action, the decision is complicated by Greek elections three days later that may empower a party which wants to restructure the nation’s debt.
ECB staff presented governors with various QE models on Jan. 7 in Frankfurt, according to a euro-area central-bank official who attended the meeting. The suggestions included buying as much as 500 billion euros ($590 billion) of investment-grade assets.
Hansson said he’d like any purchases to center on corporate bonds rather than government debt, as the ECB shouldn’t “be encouraging governments to further expand deficits.”
The Estonian central-bank head is excluded from formal votes by the Governing Council this month under revised ECB procedures, though he can still speak in discussions. The Chicago-born 56-year-old holds a PhD in economics from Harvard University and served with the World Bank in eastern Europe for a decade, becoming the institution’s chief of economic policy in China in 2008. He joined the Estonian central bank in June 2012.
Any purchase announcement this month should exclude Greek government bonds, Hansson signaled. Opposition party SYRIZA, which leads in polls ahead of the Jan. 25 ballot, has called for a debt writedown and an end to the country’s austerity package. Hansson pointed to the limits on the ECB’s mandate, which preclude it by law from monetary financing, or funding national governments by printing money to buy their debt.
“This is actually the most important among many of the constraints — there are many trade-offs but this is one that is given to us by the treaty,” he said. “When there’s a chance that somebody will come and say I’m going to restructure our debt, committing to buy such bonds is near borderline of what could be considered.”
The ECB already owns 8 percent of Greece’s bonds and Executive Board member Benoit Coeure said in an interview with France 24 on Thursday that restructuring of that debt would be illegal. Germany is open to discussing debt relief with Greece’s next government, according to lawmakers in Chancellor Angela Merkel’s coalition.
Hansson also said buying government bonds is complicated by the nature of the euro area, with 19 nations and no European debt instrument similar to US Treasuries.
“If there had been a political decision to issue more European-level bonds and you would have agreed that this is a good idea, then we could more easily behave like other central banks and buy bonds,” Hansson said. “The structure in Europe just isn’t one where the ECB can easily buy government debt.”
ECB Chief Economist Peter Praet said last month that options for limiting the risk in any bond-purchase program include buying only the highest-rated assets or making national central banks assume the default risk for the debt they buy.
Speculation that policy makers are close to embarking on QE has driven European bonds higher, pushing yields to record lows. The yield on German 5-year bonds turned negative this month for the first time on record.
“Buying only AAA-government bonds is one option,” Hansson said in the interview. “Do we really want to drive these AAA-bond yields further down? So to take and focus all your reserves on bonds that are already very highly priced definitely has its issues.”