ECB Said to Have Debated 125 Billion-Euro Asset Package in May

By Jana Randow and Simone Meier

May 21 (Bloomberg) -- The European Central Bank’s Governing Council discussed a package of asset purchases worth about 125 billion euros ($170 billion) this month, more than twice the amount finally agreed upon, people briefed on the talks said.

The package proposed at the May 7 council meeting included buying commercial paper and corporate bonds, said the people, who declined to be identified because the discussions were private. After the meeting, President Jean-Claude Trichet announced plans to acquire 60 billion euros of covered bonds, low-risk securities backed by mortgages and public-sector loans. An ECB spokeswoman declined to comment.

Germany’s Axel Weber opposed buying assets and argues the ECB should maintain its focus on getting banks to lend to each other again. Smaller countries in the 16-nation euro area pushed for the ECB to follow the Federal Reserve and the Bank of England in buying a broader range of assets to pump money into the economy and counter the possible risk of deflation.

“For an economy the size of the euro zone, 60 billion is chicken feed,” said Peter Dixon, an economist at Commerzbank AG in London. A sum of 125 billion euros is “more realistic, though it’s still half of what you’d like to see.”

The ECB’s plan is worth 0.6 percent of euro-region gross domestic product. Asset-purchase programs by the Federal Reserve and the Bank of England amount to about 12 percent of U.S. GDP and 10 percent of U.K. GDP.

Diversity

The diversity of views on the ECB’s 22-member council may make it harder for Trichet to restore consensus at the central bank and help an economy struggling to escape its worst recession since World War II. Before the May meeting, Trichet asked council members not to publicly debate the next policy steps, Austrian governor Ewald Nowotny said on April 30.

Slovenian central bank chief Marko Kranjec said in a May 13 interview that “we don’t exclude the purchase of first-class corporate bonds” and “short-term securities such as commercial paper.” He also said that an increase beyond 60 billion euros was “very likely.”

Six days later, he said that the comments were taken “out of context.”

Slovakia’s Ivan Sramko said May 14 he “can exclude nothing” on non-standard measures. Nowotny, in a speech on central banks in general, said they can buy government bonds when interest rates near zero. He later moved to “avoid some misunderstandings,” saying policy makers had a “clear common view.”

‘Powerful Comeback’

Bundesbank President Weber on May 13 insisted that 60 billion euros was the “maximum” the ECB will spend on assets and said inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected.

Athanasios Orphanides from Cyprus, the former Fed economist who has argued for an aggressive response to the financial crisis, warned the same day that deflationary expectations must not be allowed to develop.

“You have completely conflicting signals from different members, creating confusion,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “There may come a time when this cacophony becomes unbearable.”

“Intervention by Trichet to restore a certain order would help,” said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan.

‘Full Blown’

Asked on May 7 whether the ECB had considered buying other assets, Trichet said: “We have decided to engage in the purchase of covered bonds” and “have not taken any other decision on any other purchase.”

He said the ECB will give details of its covered bond purchases after its next council meeting on June 4. The securities have suffered a slump in demand during the crisis.

Weber “will block any further attempts to buy assets,” said Nick Kounis, chief euro-region economist at Fortis in Amsterdam. “As long as the Bundesbank is against it, we won’t get a full-blown” asset-purchase program.

The ECB this month cut its benchmark interest rate to a record-low 1 percent and Trichet said that’s not necessarily its lowest level. While Weber wants to make 1 percent the floor for the key rate, others say deeper cuts may yet be necessary.

Council members have also disagreed about the outlook for Europe’s recovery. Vice President Lucas Papademos said last week that “the recovery may start sooner than previously envisaged,” while Dutch official Nout Wellink warned against becoming “too optimistic when you see a few swallows flying around.”

Confidence Improves

German investor confidence rose more than economists forecast to a three-year high in May. At the same time, Europe’s largest economy shrank the most since 1970 in the first quarter and industrial output across the euro region plunged the most since at least 1986 in March.

The euro-area economy will contract 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

The Fed, Bank of England and Bank of Japan have already lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to revive growth.

To contact the reporters on this story: Simone Meier at smeier@bloomberg.netJana Randow at jrandow@bloomberg.net