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ECB to spend €1 trillion on covered bonds to kickstart euro economy ECB to spend €1 trillion on covered bonds to kickstart euro economy
(about 1 hour later)
The European Central Bank (ECB) has embarked on a spending spree that could see it pump €1 trillion into the eurozone’s financial system. The European Central Bank (ECB) has embarked on a spending spree that could see it pump €1tn (£790bn) into the eurozone’s financial system.
After months of debate, on Monday the Frankfurt-based central bank began buying covered bonds in the next stage in its battle to revive the eurozone economy and keep deflation at bay.After months of debate, on Monday the Frankfurt-based central bank began buying covered bonds in the next stage in its battle to revive the eurozone economy and keep deflation at bay.
ECB president, Mario Draghi, has made it clear the programme should return the ECB’s accumulated assets back to 2012 levels, which means that by the time officials in Frankfurt have finished, its balance sheet could have risen from €2 trillion to €3 trillion. ECB president Mario Draghi has made it clear the programme should return the ECB’s accumulated assets to 2012 levels, which means that by the time officials in Frankfurt have finished, its balance sheet could have risen from €2tn to €3tn. The aim of the move is to ease bank credit in the 18-member currency union after a difficult year that has seen a decline in business lending hamper recovery.
The aim of the move is to ease bank credit in the 18-member currency union after a difficult year that has seen a decline in business lending hamper the recovery. Covered bonds have an income stream of debt repayments backed by pools of home or commercial property loans; 90% of the global market is based in Europe, especially in Denmark, Germany, Spain, France and Sweden.
The ECB will buy covered bonds, which have an income stream of debt repayments backed by pools of home or commercial property loans; 90 percent of the global market is based in Europe, especially in Denmark, Germany, Spain, France and Sweden. The hope is that banks sell the bonds to the ECB and use the money to lend to businesses.
The hope is that banks sell the bonds to the ECB and use the money to lend to businesses. Later this year it plans to extend the move to include asset-backed securities (ABSs), which are considered safe following conservative asset valuations. Later this year it plans to extend the move to include asset-backed securities (ABSs), which are considered safe following conservative asset valuations.
But with eurozone inflation falling to 0.3%, the central bank could yet be forced to go further and adopt quantitative easing, the programme under which the US and UK central banks have bought government debt in attempt to drive down long-term interest rates and push up inflation.
The move comes ahead of a landmark health check of eurozone banks this weekend. Many analysts believe the tough stress tests could have a big impact on the markets should a large proportion of banks fail the requirements.