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News : EU Economy Last Updated: Jan 27, 2014 - 10:39 AM

ECB to consider buying packages of loans households and business
By Finfacts Team
Jan 27, 2014 - 10:29 AM

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Mario Draghi, ECB president, has hinted that the central bank could consider buying packages of bank loans to households and companies, if the deflation threat persists.

At the World Economic Forum in Davos, Switzerland, last Friday, Draghi said, "I don't see deflation in the euro area…medium-term inflation expectation remain firmly anchored at +2%."

Annual inflation at 0.8% is well below the 2% target level, which the ECB president has suggested partly reflects efforts to gain competitiveness in the peripheral economies.

Overnight EONIA rates (interbank lending rates) have been trending higher the recent weeks, with levels as high as 0.446% on December 31, 2013 and 0.359% last week compared with the official rate of 0.25%.

Draghi ruled out quantitative easing (QE), where a central bank buys government bonds or companies’ debt and thereby creating money. He said some think QE is “magic” but the European Union treaty “prohibits monetary financing.” He added that the corporate bond market was small and working well: “there is no need to do something in that field”.

“Right now securitisation is pretty dead,” the ECB president said adding, “that there was a possibility of buying asset backed securities" if they were “easy to understand, price and trade and rate."

Bruegel, the Brussels think-tank, says Spain and Italy could begin to reverse their rising public-debt-to-GDP ratios in coming years with difficulty if their economies grow while running tight budgets against a backdrop of Eurozone inflation of about 2%.

However, if the overall inflation is only 1%, then the need to become cheaper relative to Germany would push inflation in Italy and Spain toward zero. In that case, lower nominal GDP makes debts look worse. Spain's debt could rise to 120% of GDP, while Italy's could surpass 140%, Bruegel projects.

Draghi said earlier this month that the central bank would be prepared to act to counter an “unwarranted tightening of the short-term money markets.” In recent months the central bank has been looking at measures that would increase lending to the SME sectors in peripheral economies and also cut the premium on bank rates compared with levels in core economies.

A proposal to buy loans would likely be controversial and would likely be opposed by Bundesbank, teh German central bank.

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