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ECB dips toe into dead sea of rebundled debt
[FRANKFURT] The European Central Bank is set to embark this week on a scheme to buy the kind of rebundled debt that sparked the global economic crash.
With sparse investor interest its efforts could fall short.
Asset backed securities (ABS), reparcelled debt that mixes high-risk loans with safer credit, gained notoriety when rebundled home loans in the United States unravelled to spark financial turmoil.
Seven years on, seeking to pump money into a moribund eurozone economy, the ECB believes the same type of debt may make it easier to get credit to companies.
It will be safe, the ECB argues, because such European debt, whether car loans or credit cards, is typically repaid and its repackaging should be simpler to understand.
The programme is one plank in a strategy which ECB chief Mario Draghi hopes will increase its balance sheet by up to one trillion euros. If it falls short and fails to boost the economy significantly, pressure to launch full quantitative easing will reach fever pitch.
Regulators and investors are sceptical and even within the ECB expectations are muted, people familiar with its thinking say.
To limit its risk, the ECB will buy only the most secure part of such loans in the hope that others pile in behind it to buy riskier credit.
It is a strategy with little prospect of success, says Jacques de Larosiere, the former head of the International Monetary Fund who has pushed for the repackaging and sale of loans.
"While I welcome the ECB's initiative ... it cannot work if it is alone in buying the senior tranches," he told Reuters. "That is the very area where there is no problem in finding buyers. In order to have an impact, the ECB or other buyers must also be able to buy the lower-quality riskier tranches of ABS."
That view is echoed around industry. "It's not enough on its own to bring these markets back," said Richard Hopkin of the Association for Financial Markets in Europe. "The capital rules need to be changed to make it easier and cheaper for insurers to invest." Insurers, holding more than 8 trillion euros of assets, are reluctant to join the debate in public but, privately, some executives express concerns about the risks.
This bodes ill for the ECB's chances of breathing new life into a market that withered to 180 billion euros issued last year, about a quarter of its size in 2008.
The market in the United States rebounded to 1.5 trillion euros last year.
Inside the ECB, few are predicting a similar splash for a plan that was championed by Draghi after he studied Britain's funding-for-lending programme. "Some people know that this will not work," one source familiar with the matter said recently, referring to buying ABS and a more secure variant known as covered bonds. "It's too small and the problem is much, much bigger." Some at the ECB believe that if its impact is small, it could reinforce Draghi's message to reluctant governments that they too must pitch into efforts to save the economy by reforming or investing.
But Mr Draghi has had little success in convincing governments to back the purchase plan with guarantees for riskier ABS tranches, a step that would add a seal of security. The suggestion has been flatly rejected in Berlin. "I fear that there are big dangers," German Finance Minister Wolfgang Schaeuble said last May, in words that still sum of the feelings of many in Berlin now. "My warning of big liquidity risks holds for Europe and the whole world."