Nagel Sees No ’Urgent’ Need for Buying ABS, Covered Bonds

Bundesbank board member Joachim Nagel played down the significance of a European Central Bank plan to buy asset-backed securities and covered bonds.

“In the past months, the ABS market and the covered-bond market haven’t been the market segments where I had the impression that support was urgently needed,” Nagel said in a speech in Munich late yesterday. “I don’t want to create a false impression: ABS papers naturally play a very important role in the financing of banks.”

The ECB started to buy covered bonds yesterday, six weeks after presenting a purchase program that will also include asset-backed securities. The plan was designed to bolster companies’ and households’ access to financing and complements two interest-rate cuts since June and a long-term loan offer to banks.

“We have to wait what the purchase programs will bring in terms of volumes in the next couple of weeks and months,” Nagel said. “I believe we then know how much we can buy in both segments, then there will be a kind of a reconsideration about whether something additional is necessary.”

Pressure is mounting on the ECB to also buy sovereign bonds to honor President Mario Draghi’s pledge of adding as much as 1 trillion euros ($1.3 trillion) to the central bank’s balance sheet, pushing it back to levels recorded at the beginning of 2012. With both the European ABS and covered-bond markets smaller than in the U.S., Nagel said it’s “difficult to gain what is necessary to go back” there.

Structural Reforms

In any case, monetary policy can only buy time for governments to put their economies on a more solid footing, he said.

“Monetary policy cannot fix the structural issues of this region,” Nagel said. “Politics is in the driving seat, not monetary policy.”

The euro-area economy stagnated in the second quarter and inflation, at 0.3 percent last month, isn’t seen returning to a goal of just under 2 percent before 2017. The Bundesbank, which forecast German growth of 1.9 percent this year in June, has become more pessimistic after gross domestic product shrank 0.2 percent in the second quarter.

“The second half of the year could be disappointing” in Germany, with the third quarter “probably rather subdued,” Nagel said.

After factory orders, industrial production and exports all declined in August by the most since 2009, the Economy Ministry last week reduced its 2014 GDP projection to 1.2 percent, and cut its 2015 estimate to 1.3 percent.

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