According to knowledgeable sources, the European Central Bank is planning to undertake an asset-backed securities (ABS) and covered bond purchase program totaling to 500 billion euros. In a September 4th article, Reuters says European Central Bank President Mario Draghi is expected to announce the program at a news conference today unless it is strongly opposed at the earlier Governing Council’s policy meeting, which was confirmed this morning by Mario Draghi.

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Asset-backed securities are derivative financial instruments that pool mortgages and corporate, auto or credit card loans and then sell the bundled debt to insurers, pension funds or central banks.

Covered bonds are related debt instruments, but the assets backing the bonds are protected on the issuer’s balance sheet and can’t be sold. This means covered bonds are less risky than ABS where the underlying debt is not “ringfenced”.

Details on European Central Bank plan

The sources say the European Central Bank program would last three years and permit both ABS and covered bond purchases. The European Central Bank could then start purchasing assets later this year. Further details are not available yet.

Draghi spoke in Jackson Hole, Wyoming on August 22nd, saying that the European Central Bank’s preparations for an ABS purchase plan were “fast moving forward and we expect that it should contribute to further credit easing”

Euro stocks jumped on receipt if the news, climbing back from earlier losses. The euro, however, dropped to a session low of $1.31.

The European Central Bank has been developing its ABS/bond purchasing program to try and stimulate the derivatives market and to provide an alternative source of capital for small and mid-size businesses.

However, many analysts, bank execs and regulators are doubtful such a plan will revive Europe’s moribund and relatively small repackaged debt market, saying it will take years in a best-case scenario, and real restructuring of the sector is required rather than mere regulatory tweaks.

Of note, the market for covered bonds in issuance, such as Pfandbriefe in Germany, is significantly larger than the ABS market.

European economic doldrums

The main impetus for the new European Central Bank asset buying program is ameliorate the lingering economic doldrums still afflicting most of the continent. The idea is that the increased liquidity in the financial system provided by asset purchases will lead to more loans for small businesses and homeowners. The U.S Federal Reserve has had a similar asset-buying program in place for some time now, and the U.S. economy is clearly outperforming most European economies today.

This is breaking news – stay tuned for more on this very big announcement