By Alessandro Speciale and Alastair Marsh from Bloomberg
The European Central Bank said it settled 1.704 billion euros ($2.2 billion) of covered-bond purchases last week as it started its latest effort to revive the euro-area economy.
The Frankfurt-based institution began purchases on Oct. 20, returning to the market for a third time in six years as part of a renewed attempt to stave off deflation and pump life into a moribund recovery.
Investors have been closely watching the ECB’s first week of asset buying to gauge how quickly President Mario Draghi plans to fulfill his pledge of expanding the institution’s balance sheet by as much as 1 trillion euros. Even though the ECB will add asset-backed securities to the purchase plan this year, stimulus may not be enough to revive the region’s economy.
“This is bigger than we expected,” said Agustin Martin, head of European credit research at Banco Bilbao Vizcaya Argentaria SA in London. “These figures tell us that the ECB is being aggressive about expanding its balance sheet.”
With the economy stuttering and inflation forecast to have stayed below 1 percent for a 13th month in October, Draghi is under pressure to do more. While central banks from the U.S. to Japanused large-scale asset purchases to bolster their balance sheets and kick-start lending, the ECB has so far refrained from such a step.
Photographer: Andrew Harrer/BloombergMario Draghi, president of the European Central Bank speaks during a news conference at… Read More
Sovereign Bonds
German opposition to sovereign-bond purchases means officials have chosen covered bonds and ABS as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank AG say the central bank will probably need to buy other assets to reach the target.
Of the region’s 2.6 trillion-euro covered-bond market, the ECB will only buy assets acceptable under its collateral framework for refinancing loans. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about 600 billion euros, ECB Vice President Vitor Constancio said this month.
ABS buying is scheduled to begin later this quarter and there are about 400 billion euros of such assets eligible to buy, according to Constancio.
“Covered bond and ABS purchases appear to be the line of least resistance for the ECB,” said Jon Mawby, a London-based fund manager at GLG Partners LP, which manages $32 billion. “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”
Stimulus Opposition
So far, officials from Bundesbank President Jens Weidmann to Belgian central bank governor Luc Coene have said they want to judge how well the measures are working before considering other options. Governing Council member Ardo Hansson said policy makers should refrain from additional measures as current stimulus works its way through to the economy.
The ECB is also counting on its targeted long-term loans to banks to revive credit to the real economy. While a review of the balance sheets of the region’s major lenders revealed that 25 had capital shortfalls, only eight still need to plug the hole after programs enacted in the course of this year.
While the ECB was successful in completing a program for 60 billion euros of covered bondsstarted in 2009, it struggled in a second round to meet a 40-billion euro target, buying only 16.4 billion euros. So far this round, the central bank has only bought in the secondary market, according to people familiar with the purchases.
“Most people would like them to do a lot more,” said Craig Veysey, head of fixed income at Sanlam Private Investments Ltd. in London. “If the ECB can’t find enough to buy then the market will start speculating that they will have to buy corporate and government bonds as well.”
