ECB’s new front in battle to revive eurozone

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THE European Central Bank has started buying covered bonds, opening a new front in its battle to revive the eurozone economy and keep deflation at bay.

The ECB has already given banks the opportunity to borrow four-year loans and will also start buying bundled loans or asset-backed securities (ABS) later this year, having now cut its main interest rate to almost zero.

By taking some of these assets off banks’ balance sheets, the ECB is hoping to entice banks to lend more freely again, which will be crucial for the embattled eurozone’s hopes for an investment-led recovery.

The market reaction to news of the covered-bond purchases was muted. Investors have set their sights on the release of the results of the ECB’s bank health checks on Sunday, which is set to give the clearest picture yet of what state the eurozone banking sector is in.

Meanwhile, Germany and France sought to paper over deep differences about how to bolster a faltering European economy, promising to unveil joint proposals on strengthening investment and competitiveness by early December.

In Britain, the top equity index resumed its fall yesterday, giving back half the gains made in the previous session, as investors reckoned with reduced earnings expectations for oil companies after a slump in oil prices.

The FTSE has been volatile in recent weeks, hitting a 15-month low on Thursday.

Investors have been unnerved by weak European economic data just as the US Federal Reserve winds down its equity-friendly asset-purchase programme.

“There was a huge bounce on Friday, but I don’t think the volatility will go away,” said an analyst.