The European Central Bank’s purchases of asset-backed securities is boosting confidence in a revival of the market seven years after it was shuttered by the financial crisis.
Sales of the debt will jump next year by the most since 2007, increasing about 50 percent to 115 billion euros ($143 billion), according to Credit Suisse Group AG. (CSGN) Morgan Stanley and Barclays Plc (BARC) are forecasting 100 billion euros of issuance, while JPMorgan Chase & Co. (JPM) sees 95 billion euros of new debt and Bank of America Corp. (BAC) expects about 90 billion euros.
“A significant increase in new issues is an important aspect of the market’s recovery,” said Helen Haworth, head of European ABS research at Credit Suisse in London. “We expect the ECB’s participation to expand the active investor base and encourage banks” to boost sales.
The purchases are the latest stimulus measure
ECB President Mario Draghi is employing as he floods the euro area with liquidity to persuade banks to increase lending and boost economic growth. The asset-backed debt market in Europe contracted more than 40 percent in the past four years as banks stopped selling the debt after regulators blamed the securities for worsening the crisis in 2008.
Even the most optimistic of forecasts for 2015 show sales are a fraction of their peak. Issuance totaled 524 billion euros in 2006 and 325 billion euros in 2007, before plunging to less than 1 billion euros in 2008, according to data compiled by JPMorgan.
Depressed Sales
Sales averaged about 75 billion euros annually in the past five years and are expected to be less than 80 billion euros this year, JPMorgan data show. The securities, which bundle individual loans such as mortgages, auto credit and credit-card debt into tradable bonds, allow the transfer of risks from banks to investors and may encourage lenders to offer more credit.“The continuously depressed level of European ABS issuance, set against a deflationary environment characterised by declining bank-credit supply, has driven European politicians and central bankers to deduce that the European ABS market is broken and in need of revitalisation to help fund the real economy,” Barclays analysts led by Christian Aufsatz wrote in a Dec. 1 report to clients.
Government Bonds
The ABS purchases are the second phase of the ECB’s asset-buying program, which started in the covered bond market in October. With euro-area inflation slowing to 0.3 percent in November, matching a five-year low, policy makers will discuss whether current stimulus measures, which also include targeted loans to banks, are enough to prevent a deflationary spiral when they meet tomorrow.The central bank’s governing council told staff to prepare further measures to be used if needed. Draghi cited government-bond buying last month as a policy tool officials could use to stimulate the economy should the outlook worsen.
Purchases of additional securities could stunt the effectiveness of the ABS program, said Alexander Batchvarov, head of structured finance research at Bank of America in London. ABS issuance next year will depend on the scale of central bank purchases, he said.
The ECB said it bought 368 million euros of ABS in the first week of operations through Nov. 28. That was dwarfed by the 5.1 billion euros of covered-bond purchases it settled in the period. The ABS-purchase program started on Nov. 21, when the central bank bought Dutch residential mortgage-backed securities.
Borrowing costs for issuers of the securities in Europe are approaching a seven-year low, according to data compiled by Barclays. The average premium over benchmark rates is 73 basis points, the data show.
“The ECB’s purchase programs are at the front and center as we head into 2015,” Morgan Stanley (MS) analysts Srikanth Sankaran and Vasundhara Goel wrote in a note to clients yesterday. “The backdrop is ideal for locking in lower funding costs. This is clearly what the ECB is trying to engineer.”
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