World Economy

ECB to Launch Asset Buying, Enter Junk Territory

ECB to Launch Asset Buying, Enter Junk TerritoryECB to Launch Asset Buying, Enter Junk Territory

The European Central Bank has said it’s willing to use further unconventional policy tools to stave off the risk of deflation. A special asset-backed securities scheme will start later this month.

The European Central Bank said Thursday it would launch a private-sector asset buying program in mid-October, DW reported.

Following a meeting of governors in Naples, ECB President Mario Draghi told reporters the ABS scheme and the central bank’s covered bond-buying program should last for two years and help to facilitate the bank’s lending activities geared to easing the situation of companies and private households.

The unconventional measures to be started in the months ahead would help push current low inflation back up to the ECB’s annual target of just below 2 percent, Draghi added.

 Ignoring the Ratings

The Naples meeting decided that the ECB would purchase bundles of Greek and Cypriot loans, even if they happened to have junk ratings, as an integral part of the asset-buying program. This could include assets that have zero ratings, the lender emphasized.

Europe has not yet recovered from the 2008 global financial crisis, with unemployment stuck near a record high and a key manufacturing index dropping to a 14-month low.

ECB officials had been welcome to Naples by both peaceful and later violent protests by leftists, students and jobless people shouting anti-austerity slogans.

 ‘Bad Bank’

The ECB is playing its last cards in the fight against the eurozone crisis. The freshly announced purchase of junk bonds is a dance on a volcano, opines DW business editor Henrik Bohme.

At times, the ECB’s Governing Council leaves its headquarters in Frankfurt am Main and holds a meeting somewhere else in the eurozone. The latest meeting took place in Italy, the home country of ECB Chief Mario Draghi.

It could have been a coincidence that it took place in Naples – the city at the foot of the volcano Vesuvius. Or highly symbolic. It is nothing short of a dance on the volcano that the lender is inviting us to.

Europe’s economic woes have now lasted for five years. Since the outbreak of the global financial crisis, the old Continent has been shaken up and down. The national economies of the eurozone have not yet reached the levels they were at before the Lehman disaster. Especially shocking is the level of unemployment in many countries. And also the national debts that have risen to unhealthy heights.

ECB chief Draghi has promised for two years to do everything he can to save the euro. He continues to announce unconventional measures. Every option covered by the mandate of the Central Bank has been tested – as well as those that aren’t covered by it. With its monetary policy, the ECB has, alas, used up all its options.

The only options left, as it were, are no longer sound. The purchase of worthless bonds, also called junk bonds, is a continual break from taboo, just as is the devaluation of the euro in previous weeks through Draghi’s intervention.