ECB jumps gun with ABS purchase programme
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ECB jumps gun with ABS purchase programme

The European Central Bank’s announcement on Thursday that it would start a private sector purchase programme of both ABS and covered bonds was both widely anticipated and yet still quite shocking.

Mario Draghi wink-R-envelope
ECB president Mario Draghi, who needed to be seen to do something fast

It was widely anticipated as the market had been speculating on little else than ECB president Mario Draghi’s next move, from his fast evaporating list of options to stimulate growth and inflation in the eurozone, since his Jackson Hole speech in August. It was shocking as no one thought that an ABS buying programme would be up and running so soon.

Given that there was scant detail even as to the amount of ABS the ECB plans to buy – analysts interpret Draghi’s mention of expanding the ECB’s balance sheet back to 2012 levels as an €1 trillion commitment but this will cover both still-to-be introduced targeted LTROs as well as the newly declared private QE programme ­–  the announcement certainly carried a whiff of desperation. Draghi needed to be seen to be doing something fast – and short of full-blown QE this was his next best option.

The ECB only appointed BlackRock Solutions to provide advice on the design and implementation of an ABS purchase plan on August 27, so it was pretty swift work to announce it on September 4. “We expected the ECB to unveil an ABS purchase programme but the timing was a surprise to us,” admits Richard Barwell, European economist at RBS. “We pinpointed December, or March at the latest, as the likely date for such an announcement – once the ECB and BlackRock Solutions have done some of their homework, and when some of the structural and regulatory impediments to the sustainable growth of this market have been addressed.”

The lack of detail gives the impression that this was a bit of a rushed job. Further details are due to be revealed in early October, with buying poised to begin mid-month. However, the big challenges that the ECB faces in using securitization to stimulate corporate lending in Europe are very much reflected in what has been announced so far. Structural impediments include the size of the ABS market itself and the limited pool of ABS assets eligible for purchase. The ultimate goal of the scheme is to get credit moving to corporates but the notion that any programme could exclude RMBS (which dominates European ABS at around 70% of the market) was a complete non-starter.

It was therefore no surprise to see RMBS in the scope of broad assets included, nor indeed covered bonds as well. Alberto Gallo, head of macro credit research at RBS, calculates that the inclusion of RMBS more than trebles the universe of available assets to €875 billion. However, as the stimulation of mortgage lending to households is a politically sensitive pastime, and was specifically excluded from eligibility calculation for the targeted-LTRO programme that was announced in June, there does seem to be some inconsistency here.

“We were far from convinced by Draghi’s attempt in the press conference to explain this away,” grumbles Elwin de Groot, senior eurozone strategist at Rabobank.

Another structural problem is the extent of retained securitization in Europe. JPMorgan estimates that of the €880 billion eurozone ABS market, €250 billion is distributed, while €630 billion is structure-to-repo bonds. Pricing these tranches for purchase would be a challenge. “The ECB should not, and probably will not, buy fully-retained tranches without private sector involvement,” noted David Covey, head of European ABS strategy at Nomura in London, just before the announcement. “In theory they could price ABS that do not trade in the market, perhaps with the aid of an external manager or adviser, but in practice this would be difficult. Furthermore, doing so could hinder rather than help the market’s growth, by taking away potential issuance from existing investors.”

Europe is facing a very fundamental choice
if it wants to move to an ABS market that is as
deep and liquid as the US market

Benoît Coeuré

Draghi’s goal of rejuvenating the market will remain a tough one to achieve while Basel III capital charges are still so punitive for ABS. The inclusion of guaranteed mezzanine tranches in the programme echoes the existing EIB Group ABS initiative for SMEs, launched last year, under which the EIB and EIF buy and guarantee both senior and juniorSME ABS tranches. According to Dealogic, by September 5, eurozone ABS volume had reached $18.1 billion for 2014, its highest year-to-date level since 2008 and up 8% on 2013. But this is just a drop in the ocean compared with what is needed. High capital charges under Basel III and Solvency II will hamper this market until some form of consensus can be reached whereby it can be made economically viable for issuers to issue and for bank and insurance company investors to buy. Indeed, as recently as August, ECB board member Benoît Coeuré was widely quoted as stating that Europe’s securitization markets cannot be revived without greater state sponsorship. "Europe is facing a very fundamental choice if it wants to move to an ABS market that is as deep and liquid as the US market,” he said. “To reach this goal, the securitization market will require a significantly different amount of public sponsoring than is currently the case.”

So while the first step has been taken along the road of credit easing in the eurozone, there is still a very long way to go before the fruits of this exercise might be felt among the SME corporates it has been designed to help.

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