ECB starts purchasing rebundled debt in weeks
ECB announced its plans for buying rebundled debt packets in the coming weeks, to boost the flagging euro zone economy.
The European Central Bank announced on Thursday it is planning the purchases оf rebundled debt to start in weeks, as a measure of boosting the sluggish euro area economy. ECB President Mario Draghi said more will be done if needed. The measure is the last one preceding the comprehensive asset purchasing, or quantitative easing.
The announcement comes a month after a multi-directional attack in aid of the economy, comprising cheap bank loans (dubbed TLTROs) and lowered interest rates. According to Draghi, the European Central Bank has been progressing in its efforts, and financing conditions have improved a lot.
Draghi’s comments followed a decision by ECB governors to retain interest rates unaltered, at 0.05 percent. He asked the euro zone countries to strive for their budget targets, as France announced just days earlier that its budget will miss those targets.
Mario Draghi announced a program for purchasing reparceled debt, also termed asset-backed securities (ABS); and covered bonds, which are secured by solid assets, e.g. property. The plan is to start in mid-October, regarding covered bonds, and the purchases of ABS will also commence before the year end. According to the ECB President, this debt’s amount of interest for the central bank was up to 1 trillion euros, but he added the ECB purchases may not reach that amount.
The scope of ECB measures will include debts from Greece and Cyprus, which have junk credit rating. As a measure of prudence, however, those countries need to be covered by a formal international financial program if the European Central Bank is to purchase their debt.
The ECB program is to last two years at least, to stimulate the market for such credit, and also shore up lending to small- and medium-sized companies that are the crucial backbone of the European economy. As Draghi said, the measures will lead to inflation rates returning to ECB goals of close but below 2 percent. By expanding the ECB balance sheet to its early 2012 level, hundreds of billions of euros are expected to come into the euro zone economy.
Market analysis and economists are not certain about ECB achieving its goals by purchasing ABS. The average expectations are for an amount of 200 billion euros for a year, in purchases of ABS and covered bonds.
Last month, another lending scheme was started, with banks being offered cheap four-year loans amounting up to 400 billon, and the take-up was not rewarding.
With the euro zone grappling on the brink of deflation, market expectations have soared for upcoming ECB quantitative easing. According to Draghi, the ECB council were unanimous about taking further measures if necessary, which commonly means QE is in the plans. However, that is a move that the ECB will have difficulty taking due to stiff internal opposition.
The euro rose against the dollar; euro zone bond yields also rose as Draghi did not give any clues of an upcoming sovereign bond-purchasing program.
Opposition against a quantitative easing program comes from several directions. One of them, the Bundesbank governor Jens Weidmann, who is not optimistic about the success of ABS purchasing. His predecessor Axel Weber is firmly opposed as well; he resigned over a similar ECB bond purchasing program earlier. Hans-Werner Sinn, heading the German IFO, an influential economic research institute, strongly emphasized how sensitive the issue is in Germany.
ABS are created as banks pool mortgages and loans (corporate, credit card or auto loans); then banks sell them to insurers and pension funds. Now they will also sell them to the European Central Bank. Similarly, covered bonds are financial instruments; however, their underlying assets are ringfenced, so they are safer. Thus if a bank goes bust, the underlying assets remain.
ECB’s governor asked euro area governments to support the purchasing plan by guarantees on ABS tranches with risk involved, to enhance market security and encourage other buyers. Germany and France have opposed that.
The only development in the direction of the ECB plan up until now is a massive fall of the euro to nearly two-year lows; that is expected to strongly stimulate European exporters.
