The ECB plans to buy asset-backed securities (ABS) - packages of
reparcelled loans - with a view to spurring the market for such
credit and supporting lending to the small- and mid-sized firms that
form the backbone of the euro zone economy.
But for the plan to apply across the bloc, the central bank may need
to buy ABS paper below the standard it usually requires for
collateral offered up by those tapping its funding operations.
That prospect has already stirred controversy in Germany and
elsewhere. But the weak economic outlook has convinced a majority of
the ECB's 24 Governing Council members they need to act.
ECB President Mario Draghi said late on Wednesday the council would
discuss how it can get closer to its aim of an inflation rate just
below 2 percent -- inflation has slipped to just 0.3 percent.
"Yet I think we would all agree that monetary policy alone cannot do
the job of restoring confidence and returning the euro area to
growth," he told a dinner in Naples, adding: "Fiscal and structural
policies must also do their part".
Last month, the ECB said it would buy ABS and covered bonds to push
money into the economy. The bank also cut interest rates to record
lows and said they were at their lower bound.
No rate moves are expected on Thursday, but ECB President Mario
Draghi will flesh out the asset-buying plan.
"I expect them to announce a pretty comprehensive purchase program
(for ABS and covered bonds) for the next two years, and a big number
-- between 200 to 300 billion euros ($250 billion-$380 billion),"
said Berenberg Bank economist Christian Schulz.
A Reuters poll on Monday showed money market traders on average
expect the ECB to buy a total of 200 billion euros of ABS and
covered bonds over a year.
Weak manufacturing data this week underlined the bloc's problems.
After disappointing initial take-up of a new round of cheap ECB
loans to banks, Frankfurt's efforts to restart the ABS market have
come into sharper focus.
Asset-backed securities are put together by banks pooling loans made
to companies or consumers to buy homes, cars or credit cards. They
are then sold on to other banks but increasingly to insurers,
pension funds and now even the ECB.
Draghi 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 opposed such state guarantees, in
opposition that will frustrate the ECB's efforts to grow the small
The program could see the ECB buy 'junk'-rated Greek and Cypriot
bank loans, people familiar with the bank's thinking have said. Such
a step may increase the tensions between Germany and the bank.
[to top of second column]
Bundesbank chief Jens Weidmann has already opposed the ABS purchase
plan. Hans-Werner Sinn, president of Germany's Ifo economic
institute, is also against the program.
"Now the ECB is turning itself into a bad bank willing to buy junk
loans from the banks to help them get through its own stress tests,"
"They want to buy only the top tranches but you'll see that they will
be forced into buying riskier stuff too," he added.
The asset purchase initiative is part of Draghi's intention,
declared at last month, to pump money into the economy by expanding
the ECB's balance sheet "towards the dimensions it used to have at
the beginning of 2012."
The ECB's balance sheet topped 3 trillion euros in March 2012, but
at times in the first quarter of that year it was some 400 billion
euros lower, a gap that leaves uncertainty as to exactly how much
stimulus the ECB wants to deploy.
To impress markets, Draghi could
make a binding commitment to expand the balance sheet to a more
specific level, though that is unlikely.
However, the ECB president will need to signal that the bank is
ready to do more in order to sustain a depreciation in the euro,
which is trading near two-year lows, in a fall that could help lift
inflation off rock-bottom levels.
A Reuters poll of analysts showed the euro will weaken further over
the coming year, with the possibility of further ECB stimulus
dragging down the currency.
RBS economist Richard Barwell expected Draghi to signal a "greater
willingness" to embark on U.S.-style quantitative easing, which
essentially means printing money to buy assets, "but I don't think
we'll get a commitment for them to do that."
(1 US dollar = 0.7917 euro)
(Writing by Paul Carrel; Additional reporting by Paul Taylor;
Editing by Hugh Lawson/Ruth Pitchford)
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