European stocks have fallen since the beginning of the year, as analysts mull the likelihood of the European Central Bank (ECB) announcing a start to sovereign bond purchases—and debate whether a program would even work.
The decision to launch U.S. Federal Reserve-style quantitative easing (QE) could come at the ECB's next governing council meeting on January 22. The program would see the central bank purchase government securities from banks and other financial institutions in order to boost the money supply with the aim of promoting lending into the real economy.
However, Steven Major, head of fixed income research at HSBC, said banks would have little incentive to sell assets to the ECB, because of the negative rate on the central bank's deposit facility.
This unconventional policy—which means banks are charged interest for holding money with the central bank—was introduced in June 2014 in yet another effort to incentivize banks to lend money to businesses and consumers, rather than park it with the ECB.
But Major said that QE and negative deposit rates at the central bank (currently at -0.2 percent) were "mutually exclusive," despite similar intentions behind the policies.
"I don't get how they (the ECB) are going to buy a lot of bonds when the (deposit) rate is -20 basis points, because the banks are not incentivized to play," Major told CNBC on Tuesday.
"Why would a bank give up a bond, which it holds for a perfectly good reason, and give it to the ECB and get -20 basis points for a risk-free asset?"
One way for the ECB to get around this would be for the central bank to purchase bonds at a premium in order to compensate for its own negative deposit rate. Alternatively, the ECB might buy bonds directly from asset managers, said Major, skipping the banks altogether.
Despite concerns about effectiveness, recent weak economic data for the euro zone is seen as upping the chances of ECB QE. On Tuesday, Markit's much-watched composite Purchasing Managers' Index (PMI) came in weaker than expected for the euro zone, indicating that business activity grew at a slower rate than forecast.
Uncertainty about the ECB's next move, along with political woes in Greece, continue to weigh on European markets. Since the start of the year, the pan-European Euro Stoxx 600 has fallen roughly 3 percent.
With German opposition to QE seen high, there are also concerns that the ECB could opt for a watered-down program, which some analysts argue could curb its stimulus potential. One such option might include purchasing only the highest-rated sovereign bonds, in order to limit the risk taken onto the ECB's balance sheet.
"Limiting the plan to triple-A bonds would strongly cap its potential, pushing the pool of purchasable assets down to around 3.3 trillion euros ($3.9 trillion)," said Alberto Gallo, the head of macro credit research at the Royal Bank of Scotland, in a research note on Tuesday.
"This would definitely mean undershooting the ECB's soft target of 1 trillion euro purchases, given also the limited amount of liquid assets they can buy in covered bonds and ABS (asset-backed securities)."