ECB’s Plan may Backfire on Financial System

Mario Draghi’s plans for credit easing may not turn out to be all that easy.  In seeking to unblock the supply of loans to the economy by reviving the European market for asset-backed securities, the European Central Bank president risks an unprecedented reach into the functioning of the financial system that could backfire, according to academics including former Bank of England Deputy Governor Paul Tucker.

Just over a week before the ECB’s next policy meeting, where it is predicted to cut interest rates to stoke inflation, central-bank officials and researchers are meeting in Sintra, Portugal, to discuss current monetary thinking. Draghi, who has shown support for measures from negative rates to liquidity injections and large-scale asset purchases, said yesterday that buying packaged loans could reduce the “drag” on the economy.

“I would like to see an example, somewhere in the world, of someone who has successfully securitized small and medium enterprise bonds,” said Stephen Cecchetti, professor of international economics at Brandeis International Business School in Waltham, Massachusetts, and a former adviser to the Bank for International Settlements. “I don’t think this is an easy thing to do.”

Bloomberg

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