- The ECB has to make a move towards normalization. Soft tapering – though not our own core scenario – is an option. It consists of stopping or reducing reinvestments of principal payments before reducing Quantitative Easing (QE). Why choose different sequencing from the Fed?
- First, the ECB reinvestment amounts are hefty. According to our calculations, in 2018 rolling over for Germany, France, Italy and Spain will sum up to around EUR 135bn – i.e. more than two months of current QE total bond purchases. If the ECB were to stop reinvesting principals, it could free up a maximum of 17% of the EUR 4.5 trillion balance sheet over five years (EUR 712bn according to our calculations covering the main four QE-countries).
- Secondly, reducing the rolling over of principal payments can be seen as smoother (lesser amounts) and less transparent. A new form of “constructive ambiguity” from the Council?
- Thirdly, stopping reinvestments of principal payments while leaving QE unchanged could reduce potential stress for Italy more than it adds to German scarcity.
