The slow road to redemption

Demand for covered bonds should theoretically be good at the start of 2012 as investors will be flush with cash and the European Central Bank’s covered bond purchase programme will need to step up purchases to get on schedule. However, unless the wider sovereign backdrop improves, there is a risk that the paralysis continues. The road to redemption is unlikely to happen overnight but will instead be a slow step-by-step process of reform and fiscal integration. And, hopes that the ECB might put its balance sheet to greater use by committing to buy unlimited amounts of distressed sovereign debt, are probably misplaced. But, because the central bank is committed to providing unlimited repo liquidity, local banks in distressed regions should prove to be a force of stability. They should logically use cheap ECB funding to buy domestic government bonds and earn themselves a hefty carry in the process. Bill Thornhill reports