ECB considers making weaker euro zone states bear more QE risk

FRANKFURT: European Central Bank officials are considering ways to ensure weak countries that stand to gain most from a fresh round of money printing bear more of the risk and cost.

Officials, who spoke on condition of anonymity, have told Reuters that the ECB could require central banks in countries such as Greece or Portugal to set aside extra money or provisions to cover potential losses from any bond-buying, reflecting the riskiness of their bonds.

Such a move could help persuade a reluctant Germany to back plans to buy state bonds.

There is currently a stand off between the ECB and Germany's Bundesbank over ECB preparations to buy sovereign bonds, so-called quantitative easing (QE), to shore up the flagging euro zone economy.

But while the idea may help overcome opposition in Germany, which is worried that fresh money printing could encourage reckless spending and leave it to pick up the tab, critics will argue that any such conditions curtail its scope and impact.

Although a release of new money to buy state bonds appears all but certain, how it will happen remains fluid. The ECB's Governing Council holds its next monetary policy meeting on Jan. 22., with market expectations high for fresh stimulus.

Requiring weaker countries to set aside extra provisions would signal that more of the risk of potential losses would rest with national central banks, rather than the ECB in Frankfurt.

"Losses are taken by the nation states," said one official. The ECB declined to comment.

The national central banks would most likely be the ones tasked with buying their country's bonds, as part of a wider ECB programme. While easing the burden on countries like Germany whose bonds are highly rated, the ECB could place a heavier burden on more risky countries such as Greece, requiring them to set aside more money in order for the ECB to buy their debt.

It now costs roughly 1.1 million euros ($1.35 million) to insure 10 million euros of Greek bonds against default, for example, making it roughly half as risky as war-torn Ukraine.

If Greece's central bank also had to set aside more to cover the risks of its bonds, that could curb the dividend it pays the Athens government or possibly even require an injection of capital.