The Business Times

ECB to buy securitised loans, covered bonds

Separately, it cuts its main refinancing rate to 0.05% from 0.15% previously

Published Thu, Sep 4, 2014 · 10:00 PM
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[FRANKFURT] The European Central Bank on Thursday launched a new scheme to push money into the flagging eurozone economy and cut interest rates to a fresh record low.

The ECB will start buying securitised loans and covered bonds next month to help unblock lending in the eurozone, said president Mario Draghi.

"The Governing Council decided to start purchasing non-financial private sector assets," Mr Draghi said at his monthly news conference after the ECB unexpectedly cut interest rates to new record lows.

He said the bank would buy broad portfolios of simple and transparent asset- backed securities (ABS) and of euro-denominated covered bonds from October, with full details of the new programmes to be given after the ECB's next meeting on Oct 2.

Taken together with the ECB's new long-term loans to banks, to be offered for the first time later this month, "the newly decided measures . . . will have a sizeable impact on our balance sheet".

He said the ABS programme, plans for which were announced by the ECB in June, "reflects the role of the ABS market in facilitating new credit flows to the economy".

The programmes are part of the ECB's broader efforts to boost lending, particularly to smaller and medium-sized companies, which form the backbone of the eurozone economy.

Banks create ABS by pooling various loans together and selling different tranches on to investors to lighten the load on their balance sheets, which allows them to issue new credit.

Some complex ABS structures played a part in sparking the global financial crisis. The European ABS market has still not recovered, in part because post-crisis regulatory changes have made the assets less attractive to investors.

European Union finance ministers will meet on Sept 13 in Milan to discuss rekindling securitisation after issuance in Europe sank to 181 billion euros (S$295 billion) in 2013 from 711 billion euros in 2008. In contrast, the US market has sprung back from 934 billion euros in 2008 to 1.5 trillion euros last year.

Mr Draghi said that if inflation looked like staying too low for too long, the ECB Governing Council was unanimous in its commitment to using other "unconventional instruments" - a phrase taken as code for printing money as the US Federal Reserve and Bank of England have.

He added that Thursday's decisions were not supported unanimously by his colleagues although there was a "comfortable majority".

The ECB also cut its main refinancing rate to 0.05 per cent from 0.15 per cent previously and drove the overnight deposit rate deeper into negative territory, now charging banks 0.2 per cent for funds parked with it.

The lower rates will make the ECB's upcoming four-year loan offer, or targeted longer-term refinancing operation (TLTRO), more attractive as banks can now get the funds for less. But with lending still impaired, the wider impact may be questionable.

Marco Valli, an economist with Unicredit, said the cut would have little impact on the European economy. "We are speaking about a very tiny interest rate cut. They probably want to show that they won't just do rhetoric. But it will help only at the margins."

The euro slumped to less than US$1.30 on Thursday after the ECB surprised markets with a rate cut and said that it would launch an asset-buying programme to ward off deflation. The euro fell to the lowest levels for more than a year against the US dollar - US$1.2996.

The Bank of England, meanwhile, held its key interest rate on Thursday at a record-low 0.5 per cent, in its first meeting since divisions emerged over when to tighten policy.

The central bank said that its nine-strong monetary policy committee also opted to keep the level of cash stimulus, or quantitative easing, at US$622 billion. Investors shrugged off the news, however, because the decisions were in line with market expectations in view of buoyant British economic growth but also slowing inflation. - Reuters, AFP

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