Seven years after being blamed for the subprime mortgage crisis and the global financial collapse, will the European Central Bank's new bond-buying program rejuvenate the much-maligned asset-backed security?
ECB President Mario Draghi announced in September that, starting next month, the central bank would buy ABS and covered bonds from the euro zone's banks, with the idea that there would then be more credit in the economy.
"This is quite complex package of measures," Draghi told assembled journalists at his regular press conference in September.
"The purpose is very different from previous programs... the aim is to increase the measures that produce credit-easing… and also to significantly stir the size of our balance sheet towards the dimensions it used to have at the beginning of 2012."
ABS refers to securities whose value is securitized by the income from a pool of underlying assets, which can include commercial or residential mortgages, credit card debts or car loans. Securitization became increasingly popular from the 1980s onwards, but its reputation was heavily tarnished by the U.S. subprime crisis of 2007, when major banks collapsed after loading up on securities backed by mortgages which then defaulted in large volumes.
Since then the market has struggled to recover, particularly in Europe. Outstanding securitized issues stood at 1.4 trillion euros ($1.8 trillion) across the European Union at the end of 2013, down from a peak of 2 trillion euros between 2008 and 2011. Public issuance volumes remain very low, with many deals retained by the originating banks.
How the ECB's asset-buying program will impact the market depends on the details—which will not be revealed until October 2.
"At face value, the fact that ECB is saying it will buy ABS is positive, as people took a very negative view of securitization after the global financial crisis," Alexander Batchvarov, head of international structured credit research at Bank of America Merrill Lynch, told CNBC.
"But we don't know exactly what they are going to buy, we don't know from what countries and we don't know over what period of time—if the ECB buys assets over three years that's a completely different thing to if it buys over the course of a year."
Preliminary estimates suggest the central bank will announce that it will purchase a combined total of 500 billion euros ($646 billion) of ABS and covered bonds in the primary and secondary euro zone markets.
Bank of America forecast that the "simple and transparent" ABS that will be purchased is likely to include prime residential mortgage-backed securities (RMBS), consumer ABS, automobile ABS and ABS from small and medium-sized enterprises.
"We expect a continued near-term rally in what the market deems to be 'simple and transparent' ABS, and a longer term outperformance in the sectors which do not fall into that category from the euro zone," said Batchvarov in a research note this month.
Analysts at Morgan Stanley concurred, describing the ECB's announcement as a "clear positive for European ABS in general and peripheral ABS in particular".
One facet of the program that Draghi has revealed is that ABS purchases will be limited to senior tranches—debt that a company has to pay off first if it goes out of business —and so-called mezzanine tranches—which usually have some other debt attached to them—that are guaranteed by national governments or development banks.
Rosenblatt Securities' chief market strategist, Brian Reynolds, forecast that the riskier slices of deals would appeal to U.S. funds, which entered the market in the hunt for yield, and that European banks would respond to the rise in demand by creating new structured instruments.
"We know that when there is a shortage of a type of structured instrument, the Street tends to create similar products out of thin air," he said. "If the ECB does in fact become the dominant purchase of ABS's in Europe, we envision that the Street will again create more synthetic securitizations for the benefit of the credit funds."
However the ECB can only do so much. As Draghi's has repeatedly stressed in his monthly press conferences, euro zone member governments have to play their part as well.
Alberto Gallo of the Royal Bank of Scotland said that ABS would benefit if euro zone governments pressed on with reforms, implemented fiscal stimulus measures and instigated the mezzanine debt guarantees—which France and Germany are expected to oppose.
"Credit markets have priced in as much stimulus as possible… The upside is now in real economy assets (real estate, non-performing loans, ABS)," the head of macro credit research wrote in a report this month.
—By CNBC's Katy Barnato