European Central Bank to start buying private-sector debt

The European Central Bank will start buying private-sector debt instruments within days with the aim of raising the bank’s holdings of assets and steering money to the economy, ECB executive board member Benoît Coeuré said Friday.

The purchases “will have the objective to steer the balance sheet of the ECB to higher levels and to improve transmission to the real economy,” Mr. Coeuré told journalists at a conference.

Asked about recent signs of weakness in the eurozone and the risk that the bloc’s biggest economy, Germany, could be entering recession, the ECB official said “it is too early to draw conclusions from the latest numbers” and pointed out that the ECB was awaiting its own revised economic forecast in December.

Germany’s economy contracted slightly during the second quarter and recent figures on industrial production have raised fears that it may have contracted in the third quarter as well. Economists typically define recession as two consecutive contractions in quarterly gross domestic product.

Referring to the imminent start of asset purchases, which include covered bank bonds and asset-backed securities, Mr. Coeure said “we are very much in the implementation phase, but in the meantime we are monitoring, trying to understand the numbers.”

ECB Benoît Coeuré

ECB executive board member Benoît Coeuré

“We’ve been saying for quite a long time that the recovery in the eurozone is weak and uneven,” Mr. Coeuré said, adding that “there is no room for complacency either for us as monetary policy makers or for governments.” Mr. Coeuré spoke to journalists during a conference on the lessons of the economic crisis sponsored by Latvia’s central bank.

However, the ECB board member said that “the eurozone is still in a recovery path. We expect growth to be positive in the third quarter and fourth quarter in the eurozone.”

“There is no reason to depart from our conclusion that inflation expectations will gradually come up as growth recovers,” Mr.Coeuré said.

The ECB official also said that the bank had “no target” for the exchange rate of the euro, which has fallen on foreign exchange markets in recent weeks. Interest rates will remain low and “we intend to keep them rather low for a very long time,” Mr. Coeuré said.

In response to a question about what could cause the next crisis for the eurozone, Mr.Coeuré said the current crisis had not ended, but that the ECB was watching “risks stemming from the financial sector”.

“One particular area of attention, I would not say concern, is obviously shadow banking,” he said, noting that “as European banks have deleveraged over recent years, a fraction of financial intermediation has moved to the shadow banking sector and this is an area where we need to be very vigilant.”

The ECB board member also addressed what has been called a weak initial response to the ECB’s targeted long-term loan program, which provides four-year loans to banks at very low interest rates on the condition that they in turn boost lending to businesses. Banks borrowed €83 billion at the first installment of the program last month, far short of what economists had expected.

The next installment, in December, should benefit from the publication of the ECB’s review of bank balance sheets, which is due on Oct. 26. That should remove some of the uncertainty surrounding the European banking system, he said.

“We expect a strong uptake in December,” he said.