ECB Measures are Credit-Positive Event, but Challenges May Continue - Moody's (FXE) (UUP)

Whilst measures announced by the European Central Bank yesterday are broadly credit positive for the euro area, the immediate impact on the economy is likely to be limited. Furthermore, the need for new stimulus highlights the continued economic and financial challenges in the region, says Moody's Investors Service in a new report published today. In particular, the rating agency notes that it will take considerable time for purchases of asset-backed securities to engender significant alternative credit flows.

The report "Euro area: New ECB measures are credit positive, but highlight continued challenges", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

On 4 September, the ECB cut policy rates and announced that it would launch two new programmes of asset purchases, starting in October. These new purchase programmes represent a further clear commitment by the ECB to employ a range of policy tools in an effort to mitigate deflationary risks and boost growth.

In particular, Moody's notes that the new purchase programmes could provide significant support to euro area businesses over the longer term. "Banks could originate and securitise new loans, and then sell the securities on to the ECB or other buyers, boosting credit provision," notes Colin Ellis, Chief Credit Officer for EMEA.

However, Moody's also notes that the extent to which these measures boost growth will depend on the details. "The ECB will buy 'simple and transparent' ABS, but it is unclear exactly what that implies," continues Mr. Ellis. Similarly, the purchase programmes may involve a degree of co-purchasing, whereby the ECB does not buy securities on its own. In this instance, there would be a need to find private buyers who were prepared to engage alongside the central bank. Furthermore, the ECB has given no formal indication of the potential size of the purchase programmes. "Without knowing the scale of purchase programmes in particular, it is difficult to gauge their potential impact."

Moody's also notes that previous indications had suggested that an ABS purchase programme would similarly focus on revising the securitisation market, with one focus on providing alternative funding sources for businesses -- especially small and medium-sized enterprises. "Even with large-scale primary purchases, it would still take many months, if not years, before the euro area securitisation market became a significant alternative funding channel for businesses, given the dominant role of bank lending," says Mr Ellis. As such, the immediate impact of the purchase programmes may be small.

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