* ECB sees small boost from trillion euro QE - paper
* ECB's Constancio says did not discuss QE detail
* No decision on whether to favour government debt
* Euro falls to five-week low versus U.S. dollar
(Adds central bank source in paragraph two)
By Francesca Landini and David Milliken
CERNOBBIO, Italy/FRANKFURT April 4 The European
Central Bank has modelled the effects of buying a trillion euros
of assets to ward off deflation, a German newspaper reported on
Friday, a day after the ECB's president said radical policy
action might be needed.
A central bank source told Reuters that these kinds of
studies had been conducted by the ECB to gauge how such money
printing would impact inflation in the euro zone.
ECB President Mario Draghi said on Thursday the central bank
had achieved unanimity that asset purchases, also known as
quantitative easing, might be needed to tackle inflation if it
proved persistently low.
On Friday, shortly before the German newspaper report
appeared, Draghi's deputy, Vitor Constancio, said euro zone
central bankers had had no discussions of how these asset
purchases might be conducted.
However, the report in the Frankfurter Allgemeine Zeitung
implied that the purchases would need to be of a massive scale
to have much impact on prices in the 18-member currency bloc,
sending the euro to a five-week low against the dollar.
The newspaper said one ECB model showed 1 trillion euros
($1.37 trillion) of asset purchases spread over a year would
boost inflation by just 0.2 percentage points, while another
model pointed to a 0.8 percentage point uplift.
An ECB spokesman declined to comment on the details of the
report, which is the first to mention a specific sum being
considered by the central bank.
"As the Governing Council said yesterday, it is unanimous in
its commitment also to use unconventional instruments. The
relevant Committees of the Eurosystem will continue their
reflections on the various scenarios that will be made," he
The lack of detail to date about how the ECB might conduct
quantitative easing has made several economists wary about the
prospects of it being deployed soon, saying the hurdle to buying
government debt remained high.
On Friday, some observers questioned whether it would be
worth the ECB conducting asset purchases if the effect on
inflation was going to be so small.
"It sounds awfully expensive to spend 1 trillion euros to
get 0.2 percent inflation, or even 0.8 percent ... and in turn
open a can of worms with unintended consequences," said Axel
Merk, a fund manager at California-based Merk Investments.
The newspaper also quoted someone whom it described as a
central bank insider as querying whether such purchases could be
made of private-sector assets alone.
"The question would be whether the private debt market in
Europe is big enough for QE," he was quoted as saying.
Someone described as a senior central banker was reported as
expressing fears that large-scale purchases could distort
markets and create a bubble in prices for corporate bonds.
The Bank of England estimates its measures, with 200 billion
pounds ($332 billion) of government bond purchases between March
2009 and February 2010, added 0.75-1.5 percentage points to the
inflation rate and increased real gross domestic product by
GOVERNMENT BOND FEARS EASING?
ECB officials have in the past raised doubts about buying
government bonds and other state-backed securities - the
mainstay of QE in the United States and Britain - due to the
varying credit quality of national debt in the 18-member bloc.
But in an interview with broadcaster CNBC on Friday,
Constancio said concerns about moral hazard had eased.
"The fundamentals in Europe have improved, including in
distressed countries ... so the need for big pressure now is
less than it was," he said.
"If we are talking about generalised asset purchases, it
will have to be about asset purchases in all countries," he
Earlier Constancio, who is attending a conference in the
Italian lakeside resort of Cernobbio, told reporters the euro
zone economy as a whole was likely to have grown for a second
consecutive quarter in early 2014.
Constancio said asset purchases were only likely if
inflation was persistently below 1 percent, a level described by
Draghi as the danger zone.
The ECB prepares fresh staff economic projections in June,
which Constancio said would be crucial in assessing whether
March's surprisingly low inflation reading of 0.5 percent had
thrown the bank off course from its goal of reaching inflation
of just below 2 percent by the end of 2016.
(Additional reporting by Eva Taylor; Editing by Janet Lawrence)