Mario Draghi led the European Central Bank (ECB) into a new era, pledging to buy government bonds in an asset-purchase program worth at least 1.1 trillion euros (US$1.3 trillion) to counter the threat of a deflationary spiral.

The ECB president unveiled a quantitative-easing program of 60 billion euros per month until at least the end of September 2016 in a once-and-for-all push to revive inflation and the euro-area economy. The region's 19 national central banks were handed responsibility for 80 percent of the additional purchases and put on the hook for their own losses, a moved intended to assuage critics.

A near-stagnant economy and the risk of deflation forced Draghi's hand six years after the Federal Reserve took a similar step to inject cash into the U.S. The 67-year-old Italian's gamble is that the benefits of quantitative easing—should it work—outweigh the threat of a backlash in Germany, whose politicians and central bankers have vehemently opposed the move.

The ECB “decided to launch an expanded asset-program encompassing the existing purchase programs of ABS and covered bonds,” Draghi told reporters in Frankfurt. “We see sustained adjustment in the path of inflation which is consistent with our aim of achieving our aim of inflation rates close to but below 2 percent.”

Investors reacted by selling the euro and buying European stocks. The shared currency declined to an 11-year low, losing 1.4 percent to $1.1451 at 4:45 p.m. in Frankfurt. The Euro Stoxx 50 added 0.8 percent. Athanasios Vamvakidis, head of G-10 foreign-exchange strategy at Bank of America Merrill Lynch, said the plan was at the high end of market expectations

“We've been waiting for something like this,” Morgan Stanley Chief Executive Officer James Gorman said in an interview with Bloomberg Television in Davos, Switzerland. “This is a very important first step and a necessary step.”

The ECB's shift exacerbates an emerging global split. While the Fed is considering when to tighten credit, central banks in Denmark, Turkey, India, Canada, and Peru all announced surprise rate cuts in the past week. The Swiss National Bank shocked investors by dropping a cap on the franc.

Draghi made concessions to his critics. Reflecting the drive for consensus that has been a hallmark of Europe's response to years of rolling crises, Draghi allowed the inclusion of a limit to the risks that the Eurosystem as a whole will be exposed to.

Risk Sharing

The ECB will hold a share of the securities while requiring individual central banks to conduct the bond purchases in the hope that will make nations more responsible for the management of their economies.

Draghi said the ECB would limit its purchases to 25 percent of any single bond issuance and 33 percent of the instruments available from one issuer. The debt held by the ECB would not be senior to other investors' purchases.

“With regard to sharing of hypothetical losses, purchases of securites of European institutions, which will be 12 percent of additional purchases, will be subject to loss sharing,” the central banker said. “The ECB will hold 8 percent of additional asset purchases. That implies that 20 percent of additional purchases will be subject to a regime of risk sharing.”

The curbs are aimed at calming concerns aired most loudly in Germany that the ECB is unfairly aiding uncompetitive nations that do little to help themselves. Those critics also say it's an unwelcome step into politics that effectively mutualizes debt risks and finances governments through the back door. Bundesbank President Jens Weidmann has described quantitative easing as “sweet poison” for governments.

German Concerns

“We took these concerns into account and that's why this decision will mitigate those concerns,” Draghi said.

That matters now because Greek elections in three days could bring to power a party seeking to renegotiate the country's debts, most of which are held by European taxpayers.

Draghi held out the prospect that junk-rated Greece could still benefit from asset purchases by July if it remains in a European-Union monitored program.

“There's a waiver that has to remain in place, and there's this 33 percent issuer limit,” Draghi said. “If all other conditions are in place, we could buy bonds I believe in July because there will be some large redemptions.”

The downside of the horse-trading is that the program potentially packs less punch and the unwillingness to share risk exposes fault lines in the monetary union. If investors reject it as insufficient, the ECB may have to do even more later.

“The ECB left the option open to continue the purchases beyong September 2016,” said Christian Schulz, senior euro-area economist at Berenberg Bank in London. “Expectations have risen considerably in recent days, but the ECB still managed to beat most today.”

–With assistance from Alessandro Speciale and Angela Cullen in Frankfurt, Catherine Bosley in Zurich, Scott Hamilton, Jennifer Ryan and Brian Swint in London and Karl Stagno Navarra in Valletta.

Instant Insights /

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