Analysis: For markets, euro zone QE no longer unthinkable

Thu Sep 29, 2011 11:42am EDT
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By Marius Zaharia

LONDON (Reuters) - It is some measure of the depth of concern at Europe's debt crisis that some market players are actively discussing the chance of the European Central Bank printing euros -- something it has said it will never do.

Unlike the Bank of England or the U.S. Federal Reserve, the ECB does not have a history of creating massive amounts of new money through asset purchases and has never seemed open to such a move given that its mandate is to keep inflation in check.

Even at the height of 2008's financial turmoil, the closest the bank went to so-called quantitative easing was the purchase of relatively obscure covered bonds and it has sterilized all of its other liquidity measures to prevent any impact on inflation.

But the euro zone debt crisis has reached a critical point in which markets -- rationally or not -- begin to speculate about the unthinkable.

The ECB's rules do allow it to buy any asset except for sovereign debt directly from governments.

"I think it's inevitable," said Robert Talbut, chief investment officer at Royal London Asset Management, which runs assets worth about 40 billion pounds.

"They may well be facing the prospect that if they don't do something radical they will be staring down at a European recession."

Talbut argues that coupled with bank recapitalization and a writedown of Greek debt, quantitative easing would have a good chance of bringing the crisis to an end.   Continued...

<p>Euro notes are spread out at a bank branch in Madrid January 13, 2011. REUTERS/Andrea Comas</p>