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Corporate bond-buying scheme 'an option' for ECB: analysts

22 October 2014, 15:42 CET
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(FRANKFURT) - Corporate bond purchases would be one option for the European Central Bank to pump cash into the eurozone's flagging economy, analysts said on Wednesday, even as the bank said it had no such plans at present.

Nevertheless, analysts believed such a scheme was still some way off and should not be expected in the near future.

A media report that the ECB is considering launching a programme to buy company bonds to get credit flowing again in the eurozone triggered a rally in the stock markets and a weakening of the euro on Tuesday.

But the central bank was quick to dampen any such rumours on Wednesday.

National Bank of Belgium chief and ECB governing council member Luc Coene conceded that such as scheme was an option.

But "we're not yet discussing it seriously. There is no concrete proposal on the table at the moment," he told the Belgian dailies L'Echo and Tijd.

A spokesman for the ECB in Frankfurt also said that the central bank's governing council "has taken no such decision" on buying corporate bonds.

Policymakers are desperate to revive flagging growth in the euro area and kick-starting credit is seen as a vital factor.

The ECB has already launched a programme to purchase covered bonds issued by banks and is preparing a similar one to buy asset-backed securities.

Both schemes are aimed at unclogging the flow of credit in the eurozone, which has seized up as a result of the financial crisis, but is crucial to getting the region's economy back on its feet.

A broad programme of purchasing sovereign bonds, known as "quantitative easing", as practised by other central banks, has also been considered.

But Germany, the eurozone's economic powerhouse and effective paymaster, objects to it because it sees it as a way of printing money to pay a country's debt.

- Unconventional measures -

ECB president Mario Draghi has repeatedly pledged that the bank would do everything in its power to avert possible deflation -- a dangerous spiral of falling prices -- including so-called "unconventional" policy measures such as the bond purchase programmes.

The aim is to boost the amount of liquidity in the eurozone economy by increasing the central bank's balance sheet by an estimated one trillion euros ($1.3 trillion).

Berenberg Bank's Christian Schulz argued that the size of the corporate bond market -- some 1.4 trillion euros -- made such a scheme "a significant opportunity to scale up the easing potential."

This was all the more the case as the Bundesbank and the German government were stiffly opposed to any purchases of sovereign debt.

"So far, a corporate bond purchase programme is just a potential option. But given it has probably been discussed before it is a real possibility," Schulz said.

Nevertheless, "it will require further discussion and technical preparation and might only start in the first quarter of 2015."

- Bypassing banks -

RBS economist Richard Barwell explained that a corporate bond purchase scheme would enable the ECB to make funds directly available to companies, allowing banks to concentrate on getting their balance sheets in order.

In the long term, this "process of disintermediation" would "encourage the growth of this alternative form of finance to the conventional bank-centric model, inflating a spare tyre which companies can use to access funds if or when the banks are engulfed by another crisis," Barwell said.

Capital Economics economist Jennifer McKeown believed that the probability that the ECB was even considering alternative assets to buy such as corporate bonds "suggests that the bank may now be entering the realm of quantitative easing proper."

With growing evidence that the eurozone economy was on the verge of another recession, the threat of deflation was still looming large, McKeown said.

"If the ECB wished to expand its balance sheet more aggressively, the most obvious way to do so would be by buying government bonds. After all, outstanding sovereign debt is a whopping 9.0 trillion euros.

"We suspect that it will ultimately go down this road," she concluded.


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