ECB Awaiting EU Bureaucracy Decision on ABS

The European Central Bank will this week unveil details of its plan to save the eurozone from economic stagnation by buying hundreds of billions of euros-worth of private-sector assets. But one of the most crucial questions surrounding the purchases of bundles of loans, known as asset-backed securities, looks set to remain unanswered for some time.
The governing council will meet in Naples, where it is expected on Thursday to reveal which asset-backed securities and covered bonds the central bank plans to buy to revive growth and boost inflation. Analysts say inflation is likely to have fallen to a five-year low this month.

The purchases will work in tandem with the central bank’s offers of cheap four-year loans, under what it dubs its targeted longer term refinancing operations, to bloat its balance sheet by as much as €1tn between now and the end of 2016.

But one of the most vital pieces of information about the programme will almost certainly be missing.

Whether the ECB can buy the riskier parts of securitisations, the so-called mezzanine tranches, is up to governments. With the new European Commission not yet in place, eurozone finance ministers are unlikely to discuss the issue until the end of October, with a decision weeks later. The early indications are that Germany and France will not support the plan.

The ECB’s president, Mario Draghi, said earlier this month that the central bank would buy the safest slices of securitisations, known as senior tranches. But the ECB is cautious of taking too much risk on to the central bank’s balance sheet. To avoid that, Mr Draghi said the ECB would buy the mezzanine tranches only if governments would guarantee any losses.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza