ECB’s First ABS Purchases Show Caution as Further Steps DebatedAlessandro Speciale and Alastair Marsh
The European Central Bank signaled that it’ll be cautious as it buys asset-backed securities for the first time in its latest stimulus measure for the euro area.
The ECB settled 368 million euros ($460 million) of ABS purchases in the first week of operations through Nov. 28, data published on its website showed today. That’s dwarfed by the 5.1 billion euros of covered-bond purchases settled by the central bank last week.
Policy makers will meet on Dec. 4 to discuss whether current measures to flood the currency bloc with liquidity are enough to prevent a deflationary spiral that could wreck the economy. While some officials have said time is needed to assess the impact of existing stimulus, the Governing Council has told staff to prepare further measures to be used if needed, including large-scale government-bond buying.
“If you compare these numbers with the covered-bond purchases they look limited and there is definitely no bazooka,” said Aaron Baker, a London-based analyst at Banco Bilbao Vizcaya Argentaria SA. “There was a limited supply of new deals last week and it is unlikely the ECB will source substantially more ABS until the new year given the limited time-frame before the market’s seasonal shut down.”
The ECB has said it expects its balance sheet to rise toward early-2012 levels -- suggesting an expansion of as much as 1 trillion euros -- because of the asset purchases and a series of long-term loans to banks.
Covered-bond purchases started on Oct. 20 and in the first week the central bank spent 1.7 billion euros acquiring securities from Portugal to Germany. Outstanding purchases totaled 17.8 billion euros as of Nov. 28, today’s data showed.
The ABS-purchase program started on Nov. 21, when the central bank bought Dutch residential mortgage-backed securities. The ECB has said it will buy only senior tranches of the packaged debt, with the option of expanding into riskier mezzanine tranches if these are guaranteed by governments. Vice President Vitor Constancio said in October that there are about 400 billion euros of ABS eligible for purchases.
Banks create asset-backed securities by bundling individual loans such as mortgages, auto credit and credit-card debt. Covered bonds are guaranteed by the issuer and have a designated pool of assets, such as mortgages and public sector loans, which can be used to meet payments if the issuer can’t.
“The ABS program hasn’t started with a bang like we saw with covered bonds, where the ECB was very consistent in buying every day for the first few weeks,” Patrick Janssen, a fund manager at London-based M&G Investments that oversees 21 billion euros of ABS, said before the release.
The urgency is mounting for policy makers after euro-area inflation slowed to 0.3 percent in November, matching a five-year low. A plunge in oil prices to the lowest level since 2009, spurred by the Organization of Petroleum Exporting Countries’ decision not to ease a supply glut, is increasing the downward pressure.
“We will do what we must to raise inflation and inflation expectations as fast as possible,” Draghi said on Nov. 21 in Frankfurt.
Even so, German opposition to further stimulus is solidifying. Executive Board member Sabine Lautenschlaeger said on Nov. 29 that buying sovereign bonds would be a “serious incentive problem” as it would reduce the urgency for governments to pursue structural adjustments. That echoed comments the previous day by by Governing Council member Jens Weidmann, the president of Germany’s Bundesbank.
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