Deutsche bank offers for ECB crisis fight
Lahore, Islamabad, Karachi Friday, December 10, 2010, Muharram 03, 1432
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