ECB to wind down covered bond purchase programme - sources
By Marc Jones and Aimee Donnellan
LONDON, Oct 8 (Reuters) - The European Central Bank will endits second covered bond purchase programme at the start ofNovember as planned, euro zone monetary sources say, despitehaving spent less than half the money set aside for it.
The ECB introduced the 40 billion euro programme lastNovember but the overwhelming sense of fear created by the eurozone's debt crisis meant it had little of the positive impactthe original round of purchases had back in 2009-10.
It was also overtaken in importance by the trillion euros ofultra-cheap funding, or LTROs, the ECB injected into the bankingsystem in December and February and made issuing covered bondsexpensive in comparison.
Covered bonds are those guaranteed by other assets, oftenreal estate.
"We realised that the (covered bond) market wasn't as bad aswe had thought and that in fact, for various reasons, theissuance wasn't actually there," one euro zone central bankersaid on the condition of anonymity.
"There was the maximum time limit that was originally setand it was decided that if it (40 billion euro spending limit)wasn't reached by that date then so be it... It is prudent notto spend the money if it is not needed."
The ECB declined to comment but a second euro zone centralbank source confirmed the programme would be left to expire.
Policymakers and the bank's experts also know that coveredbond and other bank funding markets are closely linked tosovereign bond prices, something its new Outright MonetaryTransactions (sovereign bond buying) programme is targeted at.
NEUTRAL IMPACT
It will be the first time the ECB has not completed one ofits purchase programmes but the decision is unlikely to come asa major surprise.
With covered bond issuance dropping off in the wake of theLTROs, the ECB has had to compete with private investors forallocations.
To date, only 16.3 billion euros of the programme's 40billion euros has been spent and purchases have been creepingalong at a snail's pace in recent weeks.
"I think if the programme were to wind down it would becredit neutral for the market," said Ralf Grossmann, head ofcovered bond origination at Societe Generale.
"There has been very little primary supply in Spain andItaly which has given central banks few opportunities to assistthe banks they set about helping."
Some covered bond specialists also argue that there havebeen some unintended negative side effects from the programme.
"It has helped certain issuers throughout the past 11 monthsbut it also had the unintended consequence of damaging liquidityin the secondary market," said Richard Kemmish, head of coveredbond origination at Credit Suisse.
"Traders are much less willing to go short on bonds knowingthat the ECB might start to buy them."
One of the central bankers told Reuters that it was hard tosay whether the programme would be revived at a later date.
Analysts aren't pinning their hopes on it. "I don't see anynegative impact from just letting it finish," said one bankerwho spoke on the condition of anonymity.
"It's nice to have a backstop bid in the market but with somany investors struggling to find paper and issuers in theperiphery selling their bonds to private investors it doesn'tseem all that necessary."
(Reporting by Marc Jones and Aimee Donnellan. Editing by JeremyGaunt.)
((marc.jones@thomsonreuters.com)(+44)(0)(207 542 9033)(ReutersMessaging: marc.jones.thomsonreuters.com@reuters.net))
Keywords: ECB/COVEREDBONDS