Driving to the ECB's aid?

ECB Gets a Small Win

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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The European Central Bank has been justifiably criticized for its claim that the magic of asset-backed bonds can reverse Europe's slump back into recession. It got some support, though, from an unlikely source this week -- the market for car loans in Finland.

By the end of the year, Spain's Banco Santander plans to bundle together a bunch ofloans it made to motorists in the Nordic country to create a securitized bond worth about 500 million euros ($635 million). Presumably, the bank will use the cash it gets from selling the bonds to make more loans.

It's a small but significant victory for the the central bank's campaign to reverse the demonization of asset-backed debt, which got a bad rap for its part in the financial crisis because banks were selling what ECB President Mario Draghi's refers to as "sausages full of derivatives." He's proposing a revival of the market for simple debt, which he says has been unfairly tarnished.

QuickTake Europe's QE Quandary

The ECB plans to start buying asset-backed securities by year-end. It's a broad effort to recycle cash into the banking system and revive growth. ECB Vice President Vitor Constancio said yesterday that the region has 1 trillion euros of securities that will be eligible for the program. He noted, though, that "the amounts that we will be able to buy are lower than the theoretical amount."

Obviously, not all bondholders will want to sell, and the ECB may struggle to meet its goal of expanding its balance sheet back to the 2012 level of about 3 trillion euros. Still, the balance sheet has posted two consecutive weeks of growth for an increase of 3.3 percent to 2.05 trillion euros, which is a start:

Draghi's program is set for another boost. The European Union plans to widen the range of asset-backed debt that banks can use to meet liquidity targets, according to a draft obtained by Bloomberg News. The measures, to be introduced by financial-services chief Michel Barnier tomorrow, will also propose preferential treatment for top-quality securitizations, designed to boost their attractiveness to insurance companies, Bloomberg's Jim Brunsden reported today.

The pressure on the ECB to do more for the economy grows daily. Figures today showed that German exports plunged 5.8 percent in August, erasing July's 4.8 percent increase. The International Monetary Fund yesterday trimmed its 2015 growth forecast for the euro area to 1.3 percent, down from a July prediction of 1.5 percent.

The key question for any bank considering taking advantage of the ECB's largesse, though, is what to do with the proceeds of selling securitized bonds. There's no point offloading perfectly good assets unless you can replace them with new assets of equal or better quality.

Santander may have an unrepeatable advantage here. It has a 30 percent share of the market for Finnish auto loans, where car sales are at their lowest in five years, Bloomberg's Kasper Viita reported this week. The Finnish average car age of 13.1 years, compared with 11.4 years in the U.S., makes Santander confident that there will be growing demand for new loans as the country's auto stock needs replenishing. Other banks may not be so keen, or fortunate, in finding uses for central bank cash other than keeping it on deposit at a negative interest rate.

The first of the ECB''s targeted longer-term loan refinancing operations on Sept. 18 drew bids for just 82.6 billion euros, short of the 100 billion to 300 billion euros predicted by economists in a Bloomberg News survey. While this week's Santander bond proposal and the growth in the ECB's balance sheet are good news, Draghi will be hoping for a bigger pop in the second TLTRO round in December to deliver solid evidence that his quantitative-easing lite plans are starting to work.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net