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.
Other analysts point to political leaders inability to move fast enough to get ahead of markets and ease pressure on euro zone members deemed too big to save like Spain or Italy.
The solutions available to governments, such as common euro zone bonds, could face potentially lengthy constitutional challenges and may simply be politically undoable.
"They (the ECB) are the only game in town at the moment because politicians can't move that fast," said Charles Diebel, head of markets strategy at Lloyds Bank.
The ECB, of course, has always put the onus on governments themselves and said that the solution to the crisis is about responsible fiscal policy and frameworks. It has said it will never embark on outright QE and given no sign of changing that view.
President Jean-Claude Trichet, who hosts his last meeting next week, says the bank's role in the crisis has only ever been about keeping markets well-oiled and providing an anchor for inflation.
To create large quantities of new cash at a time when inflation is already well above the bank's 2 percent target would be the antithesis of a decade of careful control over prices.
But some analysts are discussing how it could be done.
The ECB did spend 60 billion euros in mortgage-related covered bonds in a one-year program started in June 2009. Media reports have recently suggested they could do that again, but to be able to release a larger chunk of money they would have to consider buying more liquid assets.
While buying corporate bonds or equities can trigger a dramatic shift in market sentiment and spur growth, it may not go to the heart of the problem, which is governments facing increasing funding pressure as the crisis spreads.
It is now buying Italian and Spanish debt in secondary markets and indirectly helps the two battered governments fund themselves by keeping a lid on yields. The 17-country bloc's central bank has spent 156.5 billion euros in buying government debt since May last year, first buying Greek, Irish and Portuguese paper.
But it is sterilizing the purchases by removing a similar amount of money from markets. If it decided to step up the bond purchases and stop sterilizing, it would effectively mean quantitative easing.
"When the crisis escalates the ECB has to step up to the plate," said Ken Dickson, investment director for FX and money markets at Standard Life, which runs assets worth 157 billion pounds.
"We see this current phase of the crisis as one where the ECB has to take greater and greater bond buying measures, effectively easing monetary policy through a European-style quantitative easing."
His view translates into a bet that euro zone short term interest rates have "very limited upside potential over the next 18 months." That does not go completely against the market trend, though -- the ECB is now expected to cut its key rate and expand liquidity facilities in the short-term.
STEPPING TOO FAR?
But betting on Italian and Spanish government bonds against German Bunds, for example, on the view that the ECB will at some point pursue quantitative easing, is not yet something investors are doing.
The ECB is already divided on whether to purchase government bonds at all, leading to the departure of two senior German members saying it eases pressure on politicians to reform.
"The SMP (bond buying program) is all about providing some stability to the market," said Russell Silberston, head of global interest rates at Investec Asset Management, who manages about $31 billion globally.
"But do they then become the buyer of last resort funded by printed money? I think that's of a magnitude far greater than what they've done so far. As things stand today, it's too far."
Morgan Stanley's global head of economics Joachim Fels Says the debate over quantitative easing reflects a more fundamental tension in the crisis which could eventually lead to a change in the ECB's formal mandate.
He points out that historically central banks have always been used to solve important problems and that the banks' exclusive devotion to inflation is a reflection of a historic need in Germany that may be overwhelmed by current events.
"What lacks in Europe is access to the central bank. We all know why. It was Germany's precondition for joining the euro-zone after the hyperinflation in the 1920s. But in the end it is a construction flaw."
(Additional reporting by Harro ten Wolde)