1. What is the ECB going to do? The ECB is widely expected to announce that it will accelerate and broaden its efforts to expand its balance sheet.
2. How will it do this? The ECB is currently buying two types of assets: covered bonds and ABS. Covered bonds are bank-issued bonds frequently backed  by a pool of mortgages the bank retains some of those exposures on its balance sheet rather than selling all of it to other investors. It is also buying asset-backed securities; mostly consumer and small business loans packaged by banks. In addition, the ECB is expanding its balance sheet by granting more low interest rate loans to banks under a program called Targeted Long-Term Repo Operations (TLTRO).  However, an older lending program is expiring (LTRO), and as banks repay these funds, it reduces the ECB’s balance sheet.  As deflationary pressures strengthen, and growth continues to be revised down (ECB in December, World Bank and IMF this month), the ECB wants to expand its balance sheet more aggressively.  It is widely expected that the ECB will announce a plan to buy sovereign bonds. Â
3.  Is this quantitative easing?  There is no agreed upon definition of quantitative easing or QE. The Federal Reserve did not refer to its Treasury and Agency purchases as QE, but rather called it credit easing. To the extent that QE has a meaning, it refers to a monetary policy aimed at increasing the size (quantity) of a central bank’s balance sheet.  In addition to sovereign bonds, the Bank of Japan buys corporate bonds, commercial paper, ETFs, and REITs. The ECB will widen the range of assets it buys to include sovereign bonds. It may also buy the super-nationals, such as the EU and European Investment Bank bond, and possibly the bonds issued to provide support to a number of peripheral countries.  Arguably, it should be willing to buy any asset it accepts as collateral.Â
4.  Given the slow growth of the eurozone and outright negative inflation print, why does this seem so controversial?  Although the decision to buy sovereign bonds will be  supported by a clear majority, it will not be unanimous. There are at least three sets of objections. The first is legal.  The ECB mandate bans it from monetizing sovereign debt. The same group of Germans who challenged the legality of an earlier ECB program (Outright Market Transactions or OMT) will likely challenge the legality of sovereign bond purchases. A second set of objections involves moral hazard. The monetary assistance reduces the pressure for structural reforms.  A third set of objections is on efficacy grounds. European interest rates are already at or near record low.  Seven eurozone members have negative two-year yields. Four members have 5-year yields below 10 bp, and this does not count Germany where the 5-year yield is below zero.  A derivative of this argument is that what ails the euro area cannot be addressed by monetary policy. Some argue the problem is a massive debt overhang, the lack of structural reforms, and insufficient aggregate demand. Â
