BlackRock to advise ECB on bond-buying plan

The European Central Bank has stepped up preparations for a new scheme to fight deflation by appointing BlackRock to advise on a possible bond- buying plan.

The advisory arm of the US asset manager, BlackRock Solutions, will help the ECB design a programme to buy asset- backed securities as part of the regulator’s plans to ease credit conditions in the euro zone.

BlackRock Solutions was appointed by the Greek central bank this year to investigate the balance sheets of its four big banks and worked with the Bank of Ireland during the euro zone debt crisis.

ECB president Mario Draghi said last week the bank was "fast moving forward" with preparations to buy asset- backed securities, in which banks take loan revenues from assets such as mortgages and bundle them up for sale to fixed-income investors.

Mr Draghi believes such a scheme would create demand for securitisations and provide incentives for lending to credit- starved businesses.

Fighting deflation

The ECB president suggested in January that the bank could buy packages of bank loans to households and companies as one way of fighting deflation. However he warned that too few simple asset-backed securities were being sold and more would have to be created before the ECB could buy.

The volume of European asset-backed securities sold to investors on the public market fell by 6 per cent, to €19.4 billion, in the second quarter compared with the same time last year, according to Association for Financial Markets in Europe figures last month.

In April, the ECB and Bank of England published a paper urging an easing in “unduly conservative” regulatory requirements to unblock the securitisation market in Europe.

The ECB’s governing council has not decided whether it will go ahead with an ABS-purchase scheme. It said the execution of the programme would remain the responsibility of the central bank and that safeguards against any conflict of interest at BlackRock were in place.

The move comes days after Mr Draghi used his speech at Jackson Hole to warn about low inflation in the euro zone. He said the ECB would use “all available instruments” to fight the deflation threat, interpreted to include asset purchases. His remarks sparked a rally in European equities and a fall in government borrowing costs.

Euro zone bond yields traded near record lows again yesterday. Weaker-than-expected consumer confidence in Germany drove the market, together with comments from Italy's economy minister that Rome must lower its growth forecast.

The yield on 10-year Irish bonds yesterday dropped to a record 1.7 per cent, the lowest since Bloomberg started tracking the bond data in 1991, keeping the Government's borrowing costs below that of the US and UK.

Market expectations

With Mr Draghi particularly concerned about the decline in market expectations for inflation, the latest consumer price data for Germany due later today and for the entire euro zone on Friday will be closely watched.

However, Germany’s finance minister Wolfgang Schäuble told a newspaper yesterday that Mr Draghi’s comments had been “overinterpreted” and played down the prospect the ECB might introduce more stimulus next week

Mr Schäuble told the Passauer Neue Presse in an interview that he was not pleased about comments made by France's former economy minister Arnaud Montebourg on Germany's "obsession" with austerity but this was a domestic debate in France and consequences had been drawn.

French president François Hollande ejected Mr Montebourg from his cabinet earlier this week after he and two other ministers demanded an end to austerity politics dictated by Germany.

The European Commission said yesterday France's new government must urgently speed up its reform plan, aimed at helping the economy by cutting business taxes at the same time as trimming public spending to bring the deficit to within EU limits.– (The Financial Times Limited 2014/Reuters)