adminNAPLES. — The European Central Bank (ECB) will buy bundles of loans and other forms of secured debt from mid-month in an attempt to energise a languishing eurozone economy, despite misgivings in Germany and elsewhere.
After cutting interest rates last month to what it said was “the lower bound”, the ECB left its main refinancing rate at 0,05 percent yesterday.
President Mario Draghi said the ECB would begin to buy covered bonds, a form of secured debt, from banks in mid-October and purchase asset-backed securities (ABS) — bundled loans — at some point in the fourth quarter of the year.
It hopes the programme, which will last for at least two years, will spur a market for such credit and support lending to the small- and medium-size firms that form the backbone of the eurozone economy.
“As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim,” Mr Draghi said.
If there was any doubt as to what is at stake, the ECB policy makers met in an 18th-century former palace which was thronged by hundreds of protesters chanting slogans and marching behind a banner reading, “Job insecurity, poverty, unemployment, speculation. Free us from the ECB”.
Mr Draghi said the intention was to pump money into the economy by expanding the ECB’s balance sheet back to the level it was in early 2012, which would mean adding hundreds of billions of euros — a big task.
“It’s very understandable that people are eurosceptics because things are not going well. In this part of the world (southern Europe) things are not going well because you have pervasive unemployment and you have very weak economic activity in some countries, with a recession that seems to never end.
You can’t expect people to be enthusiastic about that.”
A Reuters poll on Monday showed money market traders on average expect the ECB to buy ABS worth €200bn and covered bonds over a year.
A separate scheme to boost lending by offering banks up to €400bn of cheap four-year loans failed to attract much attention last month.
Market expectations that the ECB will launch a broad-based quantitative easing (QE) scheme have shot up in recent months as the bloc teeters on the edge of deflation. Mr Draghi said the ECB council was unanimous that it would take further steps if necessary — words commonly accepted as code for QE. But there is division within the ECB.
Bundesbank chief Jens Weidmann has already voiced doubt about the ABS purchase plan and his predecessor, Axel Weber, who resigned over an earlier ECB bond-buying programme, is strongly opposed.
“This is a risk transfer that was justified in an extreme situation but which I see in the current environment as by all means problematic,” Mr Weber, now chairman of Swiss bank UBS, told a conference in Vienna.
Asset-backed securities are created by banks pooling mortgages and corporate, vehicle or credit card loans and selling them to insurers, pension funds or now the ECB. Covered bonds are similar instruments but the underlying assets are ring-fenced so if the bank fails, the assets are still there. That makes them safer than ABS.
For the ABS plan to apply across the bloc, including countries such as Greece and Cyprus, the central bank may need to buy securities of a lower standard than it usually requires as collateral from those tapping its funding operations.
That prospect has already stirred controversy in Germany and beyond.
“We want to be as inclusive as possible, but with prudence,” Mr Draghi said, adding that checks would be put in place to minimise any risk to the ECB.
He has appealed to governments to back the purchase plan with guarantees for some riskier ABS tranches, a step that would add a seal of security to the market and encourage other buyers.
But France and Germany have rejected that.
One thing that has gone the ECB’s way is a significant fall in the euro to near two-year lows which should push import prices up and help growth via exports.
Mr Draghi said that was largely a function of the world’s major blocs being at different stages of the monetary policy cycle. The Federal Reserve is poised to end its bond-buying programme later this month.
“(The exchange rate is) not a policy target … it is, however, important for price stability and it’s important for growth,” Mr Draghi said. — Reuters.
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