While Italy continues to dominate the headlines, the European Central Bank is more interested in the big picture: the continuing economic recovery, building inflationary pressure, the end of quantitative easing and guiding expectations for what will happen to interest rates next year and beyond.

As its bond-buying programme starts to be wound down, the ECB is increasingly relying on the flow from QE reinvestments to make its presence felt in the markets. The ECB is set to purchase around as many bonds in October as it did in September (around €39bn), before that almost halves to €22bn in November. The uneven nature of its monthly reinvestments is one issue for the ECB to consider when tweaking its policies for next year.

The governing council must also decide whether to reshape its reinvestment policy to deal with the deviations from the ECB capital key (under which bonds are bought in proportion to the share of the ECB capital provided by each country) that have built up since March 2015. In several euro area countries, the national central banks have not purchased as much government debt as their capital key weight prescribed. To compensate for the shortfall, other national central banks have overbought bonds.

The ECB must choose between two scenarios: either, as of 31 December 2018, each national central bank locks in the size of its QE portfolio and runs this fixed balanced sheet for as long as the ECB chooses to carry on its reinvestment policy; or, the size of each national central bank balance sheet will be allowed to decrease or increase such that, over time, the capital key deviations are corrected. In the second scenario, the size of the Eurosystem QE portfolio stays constant, but when a government bond held in the public sector purchase programme portfolio matures in France, Italy or in Spain, the domestic central bank does not necessarily reinvest the full amount into that country. Instead the central bank of Portugal, Slovenia or Cyprus would be allowed to continue to add to their PSPP holdings until Eurosystem imbalances are corrected. This seems like a reasonable approach to follow. Moreover, as hinted by ECB Executive Board Member Benoît Cœuré in September, it could open the possibility for Greece to eventually be included in the reinvestment programme.

However, if the ECB decides PSPP reinvestments need not necessarily be made in the same jurisdiction as they were originally made, this policy shift could affect what happens to reinvestment flows as the ECB amends its capital key from the start of next year. Calculations by Jefferies International compare the projected country PSPP holdings at the end of this year with the amounts that are likely to be consistent with the new ECB capital key. For example, to balance the PSPP portfolio accurately (setting aside the ECB’s own purchases), the Deutsche Bundesbank would probably need to add €18bn to its holdings (adding an extra 3.5% to its portfolio); the Banque de France would need to reduce its holdings by around €12bn (2.8% of its existing portfolio); the Banca d’Italia’s holdings would need to fall by around €28bn (7.6% of its existing portfolio); and the Banco de España’s would need to fall by around €19bn (7.4% of its existing portfolio).

This means that in 2019, under the normal circumstances when the Banca d’Italia is expected to reinvest around €35bn and the Banco de España around €25bn from maturing bonds, the actual reinvestment flows from these two central banks may end up being only around half that size.

This is a badly-timed dilemma for the ECB – does it focus on the underbuying of bonds in the smaller (and fiscally responsible) countries such as Portugal and Ireland, or the overbuying in larger economies such as France, Italy and Spain (where the commitment to fiscal discipline is not always obvious)? This will not be an easy question to answer, but could have tremendously important implications.

Marchel Alexandrovich is Senior European Economist at Jefferies International.