ECB To Consider Further Measures

Central bank could restart covered-bond purchases, 12-month loans to banks

European Central Bank policy makers are likely to next week debate restarting their covered-bond purchases along with further measures to ease monetary conditions, a euro-region central bank official said.

The reintroduction of 12-month loans to banks will also be discussed at the ECB’s Oct. 6 policy meeting, said the person, who spoke on condition of anonymity because the information is confidential. Interest-rate cuts are likely to be discussed, though they are not on the current agenda, the official said.

The euro extended its gains, rising half a cent against the dollar to as high as $1.3543. A spokesman for the Frankfurt-based ECB declined to comment.

The ECB is under pressure to increase stimulus as Europe’s worsening debt crisis tightens conditions in money markets. The ECB purchased 60 billion euros ($80 billion) of covered bonds in a one-year program that expired in June last year and was aimed at freeing up banks’ balance sheets and encouraging lending during the region’s worst recession since World War II.

The official indicated the ECB is more likely to try non-standard measures first before resorting to rate cuts. It wouldn’t make sense to re-widen the rate corridor by cutting the deposit rate without also reducing the benchmark rate, the official said. The ECB raised its key rate twice this year to 1.5 percent.

New Tensions
ECB council members Ewald Nowotny from Austria and Luc Coene from Belgium have already said the bank may look at stepping up efforts to boost growth as soon as next month. They both identified renewed 12-month lending to banks as an option. The ECB last offered a 12-month loan in December 2009.

The central bank resumed buying government bonds on the secondary market last month to reduce borrowing costs in Italy and Spain.

The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

Tensions have reemerged, driving to a record the risk premium investors demand to buy the securities. Investors are demanding 237 basis points of extra yield above the safest government bond, according to Bank of America Merrill Lynch indexes. That’s one basis point below a Sept. 22 record and compares with 201 basis points a month ago.

‘Silver Bullet’
“The ECB sees the covered bond as some kind of silver bullet for funding problems at European banks,” said Bernd Volk, head of covered-bond research at Frankfurt-based Deutsche Bank AG. “Since the market is now in trouble, it is the right timing to put this tool on the table. It would have positive effects on the spreads and trigger new issuance.”

Banks have sold 14.5 billion euros of covered bonds so far this month, according to Bloomberg data, the lowest amount sold in that September period since 2003.

The official said ECB policy makers haven’t decided on the size of the potential new covered-bond purchase program.

Bloomberg News

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