ECB needs to signal end of ABSPP
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ECB needs to signal end of ABSPP

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The ECB should take a bold step this week to signal the end of the ABSPP, something which many in the market would welcome.

While it would be out of character for the ECB to make a definitive statement on the future of ABS purchasing this week, the central bank could offer strong indications on the general direction of ECB bond buying, given the ABS market is already expecting the end of central bank buying.

ECB board members have dropped a few hints. In a speech earlier this month, Yves Mersch suggested there would be an ECB review of ABS in the overall environment of quantitative easing.

This kind of move would be in line with the US Fed's moves towards shrinking its balance sheet in the autumn.

The ECB should take this to heart and lay out plans for the end of the ABSPP. The programme, while it has tightened the tiny number of ECB-eligible deals that have come to market, is a relatively small part of the ECB’s overall bond buying purchase programme, and withdrawal of support is unlikely to overly damage the market it is meant to support.

Non-ECB eligible paper has performed well in recent weeks, which suggests that the effect on spreads of the central bank stopping its investment in ABS paper would be minimal.

Even if there is some spread widening, in the long term a withdrawal may actually be a positive for the European ABS market, which has now hit post-crisis tights in a number of asset classes and which, according to its many critics, no longer offers true value.

A clear set of signals from the central bank would give issuers time to plan ahead for a market without public sector support, and if there are potential issuers relying on the ECB-juiced spreads which have prevailed, it gives time for them to consider alternative funding sources.

European policymakers continue to advocate a healthy and functioning ABS market — and have been willing to devote huge amounts of work to refining regulation, through the STS framework for example.

However, in order to have a functioning market, Europe needs less easy money liquidity programmes.

Faced with reliable supply from a diverse range of bank issuers, securitizing high quality collateral, investors can commit properly to the asset class, knowing that it will be investable for years, not just through a series of ad-hoc legacy deals which aren't ECB-eligible.

But step one towards this sustainable market is a clear signal that the buying programme is ending — and the ECB trusts the market enough to act without its support.

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