European Central Bank ready to start buying bonds

Mario Draghi, the ECB President, offered more details on the bank's asset purchase programmes.

The European Central Bank’s covered bond-buying programme will begin this month, and extend to countries with credit ratings below investment grade, Mario Draghi, the ECB president, said on Thursday.

Mr Draghi said that the ECB would purchase bundles of Greek and Cypriot bank loans even if they have junk ratings, in a move that marks a significant departure from how the bank has handled the Eurozone crisis so far.

Eligible junk-grade securities would not be riskier than assets elsewhere, and countries concerned must have an “continuing structural reform programme” in place with the EU, Mr Draghi added.

Describing the euro as “irreversible”, Mr Draghi said that the purchases would continue over a two-year period.

The ECB’s asset-purchase programmes “will enhance the functioning of the monetary transmission mechanism, facilitate credit provision to the broader economy, and generate positive spillovers to other markets,” Mr Draghi said.

A covered bond is a security backed by cash earned on mortgages or loans to the public sector. Ownership of the asset is not transferred from the issuer to the purchaser.

The covered bond-buying programme is part of the ECB’s package of measures to stimulate lending and raise European inflation levels from their historic lows.

The other measures in the package are long-term refinancing operations and the purchase of asset-backed securities.

The ECB accepts covered bonds as part of short-term refinancing, but not asset-backed securities.

Given Mr Draghi’s statement in July 2012 that he would do “whatever it takes” to defend the euro, the markets were watching today to see if the ECB might expand into full-fledged quantitative easing through the purchase of asset-backed securities.

Mr Draghi, however, was tight-lipped about providing details on the latter front.

Generally speaking, he said the ECB’s asset-backed security programme, which will begin in the last quarter of this year, is “oriented to boost lending to SMEs ... and the real economy”.

ECB action “will contribute to a return to inflation rates to ... at or below 2 per cent,” Mr Draghi said.

“Taking into account the overall subdued outlook for inflation, the weakening of the euro zone’s growth momentum in the recent past, and the subdued monetary and credit dynamics, our asset purchases should ease the monetary policy stance more broadly,” he said.

The announcement followed a meeting of the governing council of the ECB, which decided to keep European interest rates unchanged from their historic lows.

Mr Draghi said that the ECB’s governing council was “unanimous in its commitment to using additional unconventional instruments within its mandate” – a sign that the bank could choose to introduce quantitative easing at a later date.

Exactly what falls within the ECB’s mandate has been disputed by the German federal court, which ruled this year that the bank exceeded its responsibilities by buying beleaguered European countries’ debt.

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