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A Possible ECB Intervention In The Corporate Debt Market

Written by A Forex View From Afar on Monday, March 30, 2009

Following the European Central Bank’s tradition to pre-announce its important decisions, the Vice President, Lucas Papademos, said last week that the central bank could start buying corporate bonds. This comes after Mr. Trichet announced, at the last interest rate meeting, that the bank is preparing to adopt a new set of “unconventional” policies.

According to Mr. Papademos, the ECB could intervene in the secondary corporate debt market to bring yields down. A similar decision was taken by the Bank of England, which decided to use up to 75 billion pounds to buy corporate debt, and more recently, by the Bank of Japan. At the same time, the Fed decided a slightly different approach, to buy government debt and mortgages.

Most likely, the ECB are preparing to take this stance because they cannot intervene in the government debt market, unlike the other central banks. This happens because the ECB is formed by 16 countries, and such a move would raise many technical and fundamental problems regarding what country’s debt to buy, and in what quantity.

In Europe, a staggering majority of private loans are issued by commercial banks. As the credit crisis struck the financial world, banks began de-leveraging their balance sheets and cutting back on new lending programs. A possible ECB intervention would loosen the tight credit conditions, to some extent.

Market participants expect this measure to be announced this week, at the ECB press conference. However, its effect in the currency market is still unknown because of the lack of any further details about the plan itself. However, if the ECB disappoints, the euro will probably see strong selling pressure.

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