MNI SOURCES 3: ECB Might Have To Buy Stocks In Any Fresh QE

     LONDON (MNI) - Any future quantitative easing programme by the European

Central Bank might have to broaden the range of assets it purchases in order to

be effective, ECB sources said, stressing that the eurozone economy would have

to deteriorate significantly to prompt such a move.

     While the ECB is currently far from any return to quantitative easing, it

has stressed that the procedure is now a permanent part of its toolkit. Were it

to turn to it again, though, it would run into the problem which dogged it at

the end of its last QE programme, when it was struggling to find enough eligible

securities to buy, officials noted.

     "There is a lack of bonds to be purchased, especially in Germany, but not

only there. It wouldn't be feasible to do it the same way, so it would probably

require some extension of the assets to be purchased, maybe even stocks," a

source said. "There isn't much left of good credit quality. It's probably better

to buy stocks than junk bonds."

     For the moment, despite a sharp downturn in eurozone growth, which has

prompted the ECB to adjust its assessment of the balance of risks and announce a

new round of targeted longer-term refinancing operations to provide cheap money

for banks, discussion within the Governing Council has not touched on the

possibility of recommencing its asset purchase programme. Any immediate response

to a downturn would be more likely to come in the shape of adjustment of forward

guidance for a long period, sources said, with one saying further resort to QE

would be "a nuclear option.

     "We have always said that we have tools to respond if the situation

deteriorates further but there is nothing concrete on the cards. We still think

that H2 might be a bit better but let's see," another source said, adding, with

regards to possible QE: "It would take a real recession for that to happen and

we also still have an issue with what we could actually buy."

     Nonetheless, while the ECB ceased making net purchases of bonds in

December, it promises to continue reinvesting the principal payments from its

stock of maturing securities for at least an extended period of time past the

date when it starts raising key interest rates.

     "The reinvestments are just a smaller-scale asset purchase programme, the

programme is in fact continuing and this alone must be reassuring," another

source said. "Also, bear in mind, there is no limit to what we can purchase."

     An ECB spokesman, contacted by MNI, declined to comment.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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