Reuters News - BRICS set up bank to counter Western hold on global finances

(Reuters) - Leaders of the BRICS emerging market nations launched a $100 billion development bank and a currency reserve pool on Tuesday in their first concrete step toward reshaping the Western-dominated international financial system.

The bank aimed at funding infrastructure projects in developing nations will be based in Shanghai, and India will preside over its operations for the first five years, followed by Brazil and then Russia, leaders of the five-country group announced at a summit.

They also set up a $100 billion currency reserves pool to help countries forestall short-term liquidity pressures.

The long-awaited bank will be called the New Development Bank.

It is the first major achievement of the BRICS countries - Brazil, Russia, India, China and South Africa - since they got together in 2009 to press for a bigger say in the global financial order created by Western powers after World War Two and centered on the International Monetary Fund and the World Bank.

The BRICS were prompted to seek coordinated action following an exodus of capital from emerging markets last year, triggered by the scaling back of U.S. monetary stimulus.

The new bank reflects the growing influence of the BRICS, which account for almost half the world's population and about one-fifth of global economic output.

The bank will begin with a subscribed capital of $50 billion divided equally between its five founders, with an initial total of $10 billion in cash put in over seven years and $40 billion in guarantees. It is scheduled to start lending in 2016 and be open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent.

The contingency currency pool will be held in the reserves of each BRICS country and can be shifted to another member to cushion balance-of-payments difficulties. This initiative gathered momentum after the reverse in the flows of cheap dollars that fueled a boom in emerging markets for a decade.

BID TO CONTAIN VOLATILITY

"It will help contain the volatility faced by diverse economies as a result of the tapering of the United States' policy of monetary expansion," Brazilian President Dilma Rousseff said.

"It is a sign of the times, which demand reform of the IMF," she told reporters at the close of the summit.

China, holder of the world's largest foreign exchange reserves, will contribute the bulk of the contingency currency pool, or $41 billion. Brazil, India and Russia will chip in $18 billion each and South Africa $5 billion.

If a need arises, China will be eligible to ask for half of its contribution, South Africa for double and the remaining countries for the amount they put in.

China's official Xinhua news agency, citing unidentified sources at the Chinese FinanceMinistry, said the new bank would give developing countries a greater say in the international financial order, a theme President Xi Jinping struck ahead of the summit.

The new bank "will promote the global system of economic governance to develop in a just and fair direction," the agency said.

IMPASSE BROKEN

Negotiations over the headquarters and first presidency lasted until the eleventh hour due to differences between India and China. The impasse reflected the trouble Brazil, Russia, India, China and South Africa have had in reconciling stark economic and political differences that made it hard for the group to turn rhetoric into concrete action.

"We pulled it off 10 minutes before the end of the game. We reached a balanced package that is satisfactory to all," a Brazilian diplomat told Reuters.

Negotiations to create the bank dragged on for more than two years as Brazil and India fought China's attempts to get a bigger share in the lender than the others.

In the end, Brazil and India prevailed in keeping equal equity at its launch, but fears linger that China, the world's No. 2 economy, could try to assert greater influence over the bank to expand its political clout abroad. China, however, will not preside over the bank for two decades.

Facing efforts by leading Western nations to isolate Russia for annexing Crimea and stirring revolt in eastern Ukraine, the BRICS summit provided President Vladimir Putin with a welcome geopolitical platform to show he has friends elsewhere, economic powers seen as shaping the future of the world.

The BRICS abstained from criticizing Russia over the crisis in Ukraine and called instead for restraint by all actors so the conflict can be resolved peacefully.

(L-R) Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Brazilian President Dilma Rousseff, Chinese President Xi Jinping and South African President Jacob Zuma talk at a group photo session during the 6th BRICS summit in Fortaleza July 15, 2014

BBC News - Young hit hardest by recession, says IFS

Young people were hit far harder by the recession than older generations, a report has found.

People aged 22-30 saw their household incomes fall by 13% between 2007 and 2013, while those between 31 and 59 saw a 7% drop, according to the Institute of Fiscal Studies (IFS).

Employment prospects for the under-30s were also hit harder.

Living standards are set to be a key issue in the run-up to next year's general election.

While the government has focused on the economic recovery, the opposition Labour party says living standards have yet to improve for too many people.

'Hardest hit'

The IFS report, based on government figures part funded by the Joseph Rowntree Foundation, also found that the employment rate among 22-30 year olds over the period fell by 4%, while that among 31-59 year olds remained stable.

The over 60s saw almost no impact on either houshold incomes or employment rate.

"Pay, employment and incomes have all been hit hardest for those in their 20s," said Jonathan Cribb, research economist at the IFS.

"A crucial question is whether this difficult start will do lasting damage to their employment and earnings prospects."

The report also concluded that was "no clear North-South divide" in the impact of the recession. It also noted that home ownership among the young had fallen sharply in recent decades.

Only 21% of people born in the 1980s had bought their own house by the age of 25, compared with 34% of those born in the 70s and 45% of those born in the 60s.

The Treasury said the report showed "just how hard Labour's great recession hit young people and why it's vital we keep working through our long-term economic plan to cut the deficit, create jobs and equip people with the skills they need for the future".

Labour Treasury spokeswoman Catherine McKinnell said: "While David Cameron denies there is a cost of living crisis, these figures show people have seen a substantial fall in their incomes since 2010".

Bloomberg News - Draghi Seen Delivering $1 Trillion to Banks in ECB Offer

Photographer: Martin Leissl/Bloomberg

European Central Bank President Mario Draghi adjusts his paperwork ahead of a news conference to announce the bank's interest rate decision in Frankfurt, on Thursday, July 3, 2014

Mario Draghi’s newest stimulus tool will hand banks more than 700 billion euros ($950 billion) of cheap funding, economists say.

The European Central Bank president’s targeted lending program for banks will boost credit for the real economy as planned, and at the same time help keep the financial system flush with cash, according to the Bloomberg Monthly Survey of 45 economists. Draghi may address the topic today when he testifies at the European Parliament in Strasbourg for the first time since elections in May.

The ECB has identified lending to companies and households as a key weakness in the euro area’s fragile recovery. The so-called TLTRO program, part of a wider package of measures announced in June, offers as much as four years of low-cost funding tied to bank lending that Draghi said this month could ultimately provide as much as 1 trillion euros.

“The take-up should be large -- the money is cheap and banks should feel no stigma about accepting a free lunch,” said Alan McQuaid, chief economist at Merrion Capital in Dublin, who predicts banks will take the maximum available. “With any luck, Draghi’s next problem will not come until 2018, when 1 trillion euros needs refinancing.”

‘Strong Incentive’

Lenders probably won’t take the full amount, the survey shows. They’ll borrow 305 billion euros in the first TLTRO rounds this year, compared with an ECB cap of about 400 billion euros, according to the median estimate of economists. That’ll rise to 710 billion euros after quarterly operations in 2015 and 2016 tied to new loans, the survey shows.

Three-quarters of respondents said the measure will increase credit provision to companies and households in the euro-area periphery. The loans are charged just above the ECB’s benchmark interest rate, currently at a record-low 0.15 percent.

“On the one hand, the program provides a strong incentive to expand lending, especially for banks with higher funding costs,” said Kristian Toedtmann, senior economist at Dekabank in Frankfurt. “On the other hand, there are other impediments to lending, such as a lack of capital or macroeconomic risks. But in total, the program should contribute to a pickup.”

The TLTRO will run alongside the unprecedented stimulus measures that the ECB announced after its June 5 policy meeting, including a negative deposit rate and an extension of unlimited short-term liquidity until at least 2016. After the July gathering, Draghi reiterated his pledge that rates will stay at present levels for an extended period.

Forward Guidance

In the survey, 86 percent of economists said Draghi’s comments strengthened his forward guidance on rates. The proportion forecasting the ECB will start increasing official rates next year dropped to 13 percent from 31 percent in last month’s survey. The share saying rates will rise in 2017 or later more than doubled to 42 percent.

“We believe that the ECB has been increasingly successful in cementing expectations that rates will stay low well into 2016,” said Elwin de Groot, an economist at Rabobank in Utrecht, the Netherlands.

The survey also showed economists predict ECB preparations to buy asset-backed securities will take longer than previously thought. The program could add liquidity to the market and bolster the market for securitization, offering companies an alternative to bank financing.

‘Too Difficult’

About 44 percent of respondents expect the ECB to start an ABS-purchase program by the fourth quarter of this year, down from 52 percent in last month’s survey.

ECB Governing Council member Ewald Nowotny said last week that while the central bank is willing to buy ABS if the technical and economic conditions are right, it should agree on a program by the end of the year or be prepared to drop it.

“If we’re not able to come up with some kind of plan this year, the conclusion should be that, unfortunately, it is too difficult for Europe, given the material differences, and that it would make no sense,” he said in an interview in London. “This is in Europe much more difficult than in the U.S. and the U.K. because of strong divergences, not least on the legal side.”

Economists remain split on the need for broad-based purchases of assets including government bonds. Just over 50 percent said the ECB won’t implement QE at all, little changed from the last survey. Fifteen percent said the measure will be implemented before the end of the year.

Recovery Risk

Draghi has said large-scale asset purchases could be used if the medium-term outlook for inflation worsens. Nowotny said QE is “is not the really relevant discussion we have now.”

Even so, euro-area inflation has held below 1 percent for the past nine months, less than half the ECB’s goal, and was at 0.5 percent in June. A composite index of services and manufacturingactivity last month compiled by Markit Economics slid to the lowest level this year.

Concern that the region’s recovery could falter and that it remains vulnerable to financial shocks have been compounded after a member of the Portuguese banking group that includes Banco Espirito Santo SA, the nation’s second-largest lender, missed payment on short-term debt. That roiled global markets and sent yields on 10-year Portuguese bonds to the highest level since May 21.

Portuguese government debt advanced for a second day today as investor concern diminished that missed payments by a Portuguese bank would fuel a new banking crisis in the euro area’s most indebted nations. The country’s 10-year yield fell 10 basis points, or 0.10 percentage point, to 3.77 percent at 9:06 a.m. London time, after climbing 28 basis points last week, the biggest weekly jump since September.

Economic Outlook

Just 14 percent of economists in the Bloomberg survey said the euro area’s economic situation will improve in the next four weeks, down from 35 percent a month ago. Three-quarters of respondents said the outlook will remain the same.

“The perception of the euro zone’s current state has weakened considerably,” said Christopher Matthies, an economist at Sparkasse Suedholstein in Neumuenster, Germany. “There is increasing uncertainty about the strength of the recovery taking place.”

To contact the reporters on this story: Alessandro Speciale in Frankfurt ataspeciale@bloomberg.net; Andre Tartar in London at atartar@bloomberg.net

BBC News - Banco Espirito Santo: Portugal seeks to calm fears over bank

Portugal's central bank has sought to steady investors' nerves by stating that Banco Espirito Santo does not need extra funds

Banco Espirito Santo itself has said it has sufficient finances to deal with its parent company's debt problems.

Worries about the financial strength of the bank's parent company hit global stock markets on Thursday.

The central bank said investors had "no reason to doubt" the security of funds, and savers had "no need to be worried".

Restructuring plan

On Thursday, shares in both Banco Espirito Santo (BES) and Espirito Santo Financial Group - which holds a 25% stake in BES - fell sharply on worries about the financial health of the Espirito Santo group.

Lisbon stock market regulators suspended trading in BES shares after they plunged by more than 17%. After the ban was lifted around midday on Friday, the shares gained close to 4% to 0.53 euros.

The overall Portuguese market was more than 2% higher meanwhile, after losing 4% on Thursday.

On Thursday evening, Banco Espirito Santo said it was "waiting for the release of the restructuring plan of Espírito Santo Group in order to assess the potential losses related to its exposure".

"BES Executive Committee believes that the potential losses resulting from the exposure to Espírito Santo Group do not compromise the compliance with the regulatory capital requirements."

Borrowing costs

The country's Prime Minister echoed the Portugal central bank's message that BES was not in need of support.

Mr Pedro Passos Coelho said: "There is no reason for the state to intervene in a bank which has solid capital and which has a comfortable margin to deal with any eventuality, even the most adverse".

Nordine Naam, a strategist at financial group Natixis said: "The Bank of Portugal... has reassured the market and calmed the situation."

The events triggered a fresh outbreak of nerves about European banks, sending stock markets in Europe and the US lower.

There were concerns that the bank's troubles could have a wider impact on Portugal which only two months ago exited the bailout programme.

At the height of the financial crisis, Portugal was forced to take a 78bn euro ($106bn; £62bn) bailout from its European partners and the International Monetary Fund.

Government borrowing costs fell to an eight-year low of 3.58% in April this year, but worries surrounding BES and the health of the country's financial sector pushed these back up towards 4% on Thursday.

Market strategist Stan Shamu said: ``I suppose the question on investors' minds is whether this latest Portugal banking crisis will lead to contagion in the region."

"Judging by the reaction in the single currency, then possibly the market doesn't quite feel this is the case.''

Bloomberg News - Modi Budget Seen as Opportunity Missed After India Win

Photographer: Vivek Prakash/Bloomberg

An employee checks the air pressure of a motorcycle as a customer waits at a Bharat Petroleum Corp. gas station in Mumbai, India

Prime Minister Narendra Modi’s first budget since his election win was seen as a missed chance to take tough measures on subsidies by economists at banks including Deutsche Bank AG and Nomura Holdings Inc.

Finance Minister Arun Jaitley retained the fiscal shortfall target at 4.1 percent of gross domestic product while leaving revenue and expenditure forecasts largely similar to an interim budget in February. At the same time, he unveiled plans to “overhaul” food and fuel subsidies to narrow the fiscal gap to 3 percent of GDP in 2017.

The budget was “almost a copy and paste of the interim budget” and “a lost opportunity” to detail bold steps to revive economic growth, Taimur Baig, director of Asia economics in Singapore at Deutsche Bank AG, told Bloomberg TV. “If they had some tough measures, Indians would have taken it. They have the appetite, they have given them the mandate, but somehow or the other the government didn’t follow through.”

Rising oil prices and a weak monsoon risk inflating a subsidy bill that has risen fivefold over the past decade, threatening Modi’s efforts to narrow the budget deficit to a seven-year low. Government spending has stoked Asia’s fastest inflation, prompting the central bank to keep interest rates elevated in Asia’s third-biggest economy.

“There weren’t measures that told us how this deficit target was going to be achieved,” said Atsi Sheth, a senior vice president at Moody’s Investors Services. “I certainly don’t think that we know any more about what they’re going to do over the next five years than we did yesterday.”

No Answer

Jaitley sought to manage expectations early on when presenting the budget to parliament yesterday, saying “it would not be wise” to expect big changes 45 days after the government took office. He pledged to bridge the fiscal gap by increasing revenues as a percentage of the economy, in part through expanding the tax base, while leaving subsidies untouched.

“When for 66 years various governments have not found an answer to these subsidies, I should produce an answer? Obviously, it is not possible,” Jaitley told NDTV 24X7 television channel after presenting the budget. “This is just the beginning of this government and not the end of the government. Please bear in mind improvement and reforms are an ongoing process.”

‘Sensationalized Expectations’

India’s benchmark stock index fell 0.2 percent as of 11:11 a.m. in Mumbai, while the rupee strengthened 0.1 percent. Stocks have gained 5.1 percent since Modi’s win on May 16, among Asia’s top performers in that time, on bets that the first parliamentary majority for a single party since 1984 will enable him to make tough choices.

“The mandate we’ve received may have sensationalized expectations, but we need to establish a careful balance to keep revival sustainable,” Commerce Minister Nirmala Sitharaman said in an interview with Bloomberg TV India yesterday. “This is the course we are on.”

The measures announced by Jaitley reduce revenues by as much as 0.2 percent of gross domestic product, Andrew Colquhoun, head of Asia-Pacific Sovereigns Group at Fitch Ratings, a credit-rating company, said in a statement.

“Fitch is surprised that the Indian Finance Minister Arun Jaitley has stuck with the outgoing government’s fiscal consolidation path,” Colquhoun said. “The agency is currently unsure how this can be met without further revenue-strengthening or expenditure-saving measures.”

‘Disappointment’

Jaitley projected revenues will rise to 11.9 trillion rupees ($198 billion), 1.9 percent more than the previous government forecast in February, boosted by higher asset sales. Expenditure will increase 1.8 percent to 17.9 trillion rupees, with subsidies maintained at about 2.6 trillion rupees.

“The government did not use the opportunity to come clean on subsidies, which is a disappointment,” Nomura economists Sonal Varma and Aman Mohunta said in a note. “However, a greater focus on investments, measures to attract capital inflows and measures to boost household disposable income (through higher exemption and tax deduction limit) are positives.”

Jaitley had criticized former Finance Minister Palaniappan Chidambaram after the interim budget in February, saying he narrowed the deficit by cutting planned spending on roads, bridges and power plants, while underestimating and deferring subsidy payments.

‘Real World’

Chidambaram also assumed GDP growth for the fiscal year at 6.5 percent, higher than the central bank’s best-case scenario of a 6 percent expansion. The finance ministry said this week it expects the economy to expand as much as 5.9 percent.

“Welcome to the real world,” Chidambaram said in a statement, adding that the budget retained the imprint of many of his government’s policies.

India’s fiscal deficit in the two months ended May was 2.4 trillion rupees, or 46 percent of the full-year target. Jaitley proposed to set up a commission that would assess ways to cut government spending while pledging to target food and fuel subsidies to protect the marginalized and poor.

“They will take some time to meet their overriding expectations,” said Rupa Rege-Nitsure, chief economist at Bank of Baroda. “If foreign investors do the budget arithmetic, they will see that the government is trying to be more liberal and externally oriented. It is definitely a positive.”

‘Lost Opportunity’

Jaitley announced plans to revive special economic zones while building more highways, coal-fired power plants, airports and ports. The government will also spend 2 billion rupees to build the world’s largest statue of independence hero Sardar Vallabhai Patel, while allocating about 3 billion rupees on programs to ensure women’s rights and safety, Jaitley said.

India will raise the caps on the automatic approval for foreign direct investment in the defense sector to 49 percent, from 26 percent now, Jaitley said, with anything more than that requiring special approval. The FDI limit in the insurance sector would also be raised to 49 percent, he said.

Jaitley said he hoped to reach a final solution on a goods and services tax by the end of the year. He also announced a review of cases where levies were applied retrospectively, disappointing analysts who wanted the cases to be scrapped, a move that may affect a $2.4 billion claim onVodafone Group Plc (VOD) over a 2007 acquisition.

“It is a lost opportunity in terms of a bold move that would have fired up the investment climate tremendously,” said Sudhir Kapadia, a partner at Ernst & Young LLP.

Spending on fuel, food, fertilizer and other subsidies rose to 16 percent of India’s total budget in the year ended March 2014 from 9 percent in 2004, while plan spending climbed to 30 percent from 26 percent, according to budget documents. Two-thirds of India’s 1.2 billion people live on less than $2 per day, according to the World Bank.

“This is a tiny step in the right direction,” Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc, said by phone. “Jaitley delivered as much as he could, but really we have a long road ahead of us.”

To contact the reporters on this story: Unni Krishnan in New Delhi atukrishnan2@bloomberg.net; Andrew MacAskill in New Delhi at amacaskill@bloomberg.net

Reuters News - ECB looks to banks to deliver quantitative easing on its behalf

The headquarters of the European Central Bank (ECB) is pictured prior to the bank's monthly news conference in Frankfurt July 3, 2014

(Reuters) - The European Central Bank is hoping a new round of long-term loans will be used by banks to drive down borrowing costs - a substitute for an asset-purchase scheme of its own which would avert a potentially damaging internal split.

The ECB unveiled the loans plan last month as part of a package of measures to breathe life into a sluggish euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.

Presented as a means to foster bank lending to businesses, the scheme is in fact a hybrid program that also offers banks access to cheap funding for four years with which they can buy financial assets.

Policymakers hope that in the round it will create a "credit multiplier" effect, tantamount to enabling the private sector to embark on quantitative easing (QE) - creating money to buy assets to keep borrowing costs low and boost spending - on the ECB's behalf.

"It's loans but not only loans," ECB Executive Board member Peter Praet said of the funding program.

"It's also the liquidity injection, the funding substitution," he told Reuters in Paris on Wednesday.

The idea is that one or more of three things will happen:

Banks will use the money to lend to households and businesses, thereby directly helping to revive the economy; they take the money and buy assets themselves; they use the funds to substitute for issuing their own debt.

The latter two could lower the funding costs for all banks, even those who don't take the ECB's money, and spill over into looser conditions in the broader corporate credit market, hopefully making money cheaper and easier to access.

In a speech in Paris on Wednesday, Praet said the loans plan, or TLTRO, "has the potential to halt the vicious circle of constrained lending, weak macroeconomic conditions and elevated loan delinquencies, and re-ignite a positive 'credit multiplier' process".

Under the plan, banks can borrow up to 400 billion euros ($545 billion) in September and December at a slight premium to the ECB's regular funding operations. They have subsequent opportunities running through to mid-2016 to take additional loans.

Banks that have shown positive net lending between April of this year and the new funding operation can borrow up to three times their net new lending in that window and keep the money until 2018, so long as they continue to increase lending.

The terms of the plan do not stipulate, however, that banks must devote all the ECB loans to new lending, allowing the possibility of using some of the money for their own funding purposes or to buy assets.

"They are offering banks very cheap funding and asking the banks to expand their balance sheets, and in the process they will create money and they will buy assets," said RBS economist Richard Barwell.

"That will look an awful lot like what the ECB might have done themselves," he said. "But it won't be the ECB buying the assets, it will be the private sector buying the assets. So to me it looks a lot like arms-length QE."

Quantitative easing involves a central bank buying financial assets from banks and other private institutions with newly-created money, thereby increasing the amount of cash sloshing around an economy which should make it cheaper to borrow and easier to spend.

The money from the TLTROs (targeted longer-term refinancing operations) will eventually be repaid but it will expand the euro zone's money supply for four years.

BARRIERS TO QE

At the ECB, hopes are being pinned on the long-term loan operation to deliver the goods.

"We've taken decisive action in June, if this is not enough we will do more but we have no reason to believe this will not be enough," ECB board member Benoit Coeure said on Wednesday.

But what if the plan doesn't make a significant difference?

Many banks are in risk-off mode as they shape up for ECB health checks before the central bank takes over supervision of Europe's bigger lenders from November. And there is no guarantee they will loosen up on lending thereafter.

There is also the question as to whether there is corporate and consumer demand for a lot of new borrowing.

"I think the big headwind on the credit multiplier is the banks themselves," said Sassan Ghahramani, CEO of New York-based SGH Macro Advisors, which advises hedge funds.

"It's a terrible environment for them," he said with reference to the ECB health check and pressure for capital restructuring. "Undoubtedly it (the TLTRO) is going to help rather than harm. The question is the multiplier issue – there is a bottleneck with the banks."

The ECB also wants the plan to work as the barriers to the central bank embarking on an asset-purchase program itself are high.

Sabine Lautenschlaeger, a former Bundesbank vice president who now sits on the ECB's Executive Board, the nucleus of the broader policymaking Governing Council, said on Monday a broad ECB asset-buying plan should only be unleashed in an emergency such as the imminent threat of deflation.

"Such risks are, however, neither perceptible nor do we expect them," she said.

Hours after ECB President Mario Draghi's news conference last Thursday where he said the ECB could yet do more to loosen policy and that there was unanimous agreement to do so if necessary, Bundesbank chief Jens Weidmann responded that interest rates should not be left too low for too long.

SMALL WINDOW OF OPPORTUNITY

Even those less opposed see no prospect of unleashing QE soon. The consensus among ECB policymakers is that they must first allow the package of measures announced in June - which included cuts to all the main interest rates - to take effect and that this will take them into next year.

Even if the Council were to favor QE in 2015, the global policy environment might make embarking on such a policy tricky as the U.S. Federal Reserve is expected to start raising interest rates around the third quarter.

A tightening of Fed policy would lead to a repricing of risk and could prove a difficult environment for the ECB to head firmly in the opposite direction, according to people familiar with the ECB's thinking.

That leaves a potentially small window of opportunity and means the TLTRO really needs to work.

"We will implement what we decided in June including the targeted long term refinancing operation and we are very confident that this will help," Coeure said.

One consequence could be to generate a so-called 'portfolio rebalancing effect' whereby banks use TLTRO funds to partially substitute for issuing their own bonds.

Praet said in Paris that via such a substitution effect "the TLTROs can create a scarcity of investible assets, which will result in lower yields and easier market funding conditions even for banks that have not taken part in the operations".

If banks take the ECB money and issue fewer of their own bonds as a result, so the logic goes, then the diminished supply will push up prices and lower yields on bank bonds.

"It may also create spillover effects to other segments of the corporate credit market, as investors in bank bonds will be induced - by a scarcity of supply – to diversify away from that market and re-invest in other market segments," Praet said.

A downside of the ECB's plan is that it cannot fully control what banks choose to do with the new money.

Aside from fulfilling their obligation to keep their lending on an upward trajectory, banks can choose to fund themselves or buy assets with the cheap ECB money as they like.

But that may be a price worth paying to avoid a bloody battle over printing money which, for some in the ECB, remains the ultimate taboo.

"There is a compromise here," said Barwell at RBS.

"They (the ECB) have given up essential control over what assets are bought and what the final impact will be but they've avoided having to call the shots themselves – they've avoided that endless debate about what to buy and whether QE would allow politicians to drag their feet on reforms."

($1 = 0.7331 Euros)

(Additional reporting by Deepa Babington and Renee Maltezou in Athens. Editing by Mike Peacock)