Deutsche bank of­fers for ECB cri­sis fight

La­hore, Is­lam­abad, Karachi Fri­day, De­cem­ber 10, 2010, Muhar­ram 03, 1432

The Pak Banker - - Front Page -

FRANK­FURT: The Euro­pean Cen­tral Bank (ECB) should draft com­mer­cial len­ders as al­lies in its fight to stem the euro-re­gion fi­nan­cial cri­sis by giv­ing them in­cen­tives to buy bonds of debtswamped gov­ern­ments.

The Euro­pean Cen­tral Bank should draft com­mer­cial len­ders as al­lies in its fight to stem the euro-re­gion fi­nan­cial cri­sis by giv­ing them in­cen­tives to buy bonds of debtswamped gov­ern­ments, Deutsche Bank AG says.

In his pro­posed "Plan B," London-based Deutsche Bank econ­o­mist Gilles Moec said the ECB would limit col­lat­eral for one-year cen­tral bank loans to in­vest­ment-grade sov­er­eign paper rated less than AAA, en­cour­ag­ing pur­chases of debt sold by Spain, Italy, Por­tu­gal and Ire­land. He also sug­gested a "mar­gin-call hol­i­day," free­ing banks from pro­vid­ing more col­lat­eral if the value of the swapped bonds falls.

"In­vestors still don't know whether to buy from the pe­riph­ery," Moec, a for­mer Bank of France of­fi­cial, said in a tele­phone in­ter­view. "But the rates the pe­riph­ery are pay­ing should be quite tempt­ing so it wouldn't take much for in­vestors to start buy­ing their debt." Ger­man 10-year bonds slid yes­ter­day, send­ing the yield on Europe's bench­mark govern­ment debt se­cu­ri­ties, to more than 3 per­cent for the first time since May as the re­gional cri­sis cooled. Ir­ish bonds rose, cut­ting the ex­tra yield in­vestors de­mand to hold the se­cu­ri­ties in­stead of Ger­man bunds to the least in a month, af­ter law­mak­ers in Dublin passed an ini­tial se­ries of bud­get votes.

Moec's pro­posal would take the pres­sure off the Frank­furt-based ECB to keep buy­ing the bonds of Ire­land, Por­tu­gal and Spain to calm mar­kets as Euro­pean pol­icy mak­ers squab­ble over how to con­tain spread­ing debt losses. The ECB bought the most bonds since June last week, help­ing re­verse debt-mar­ket de­clines. The ECB said last week it would con­tinue to keep of­fer­ing banks as much cash as they want through the first quar­ter over pe­ri­ods of up to three months at a fixed in­ter­est rate. Moec's plan, which he said could com­ple­ment the cur­rent liq­uid­ity pro­grams, would re­duce the col­lat­eral the ECB would be will­ing to ac­cept when lend­ing for a year. Among the as­sets ex­cluded would be the govern­ment bonds of the six euro-area na­tions with AAA rat­ings such as Fin­land and Ger­many.

In ad­di­tion to help­ing re­duce yields in the most­strained mar­kets, the plan would give gov­ern­ments breath­ing room to cut their bud­get deficits, yet not let them off the hook for do­ing so be­cause the col­lat­eral would re-en­ter the mar­ket af­ter a year, Moec said. "Gov­ern­ments would in ef­fect be given 12 months to demon­strate to the mar­ket their ca­pac­ity to ad­dress their fis­cal is­sues, which re­duces the moral haz­ard," he said. -PB News

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