ECB to spend 40 billion euros on covered bonds

The European Central Bank (ECB) will spend €40 billion on covered bonds beginning next month, and will offer banks two additional unlimited loans of 12- and 13-month durations.

Jean-Claude Trichet, president, ECB, said the €40 billion euros covered bond programme would run for a year and will be similar to the first programme. The ECB hopes to boost Europe's economy by ensuring additional financing for its beleaguered banks. Last year, when it ventured into buying covered bonds, the ECB bought 60 billion euros worth of paper.

The ECB, which left its key interest rate unchanged at 1.5 per cent, has also decided to continue lending banks as much money as they need under its regular refinancing operations at least till July next year.

Bank of England has also announced its quantitative easing (QE) policy which envisages buying £75 billion worth of bonds, taking the total QE to £275 billion since its launch in 2009 (See: BoE injects £75-bn through further quantitative easing) 

The ECB will start buying covered bonds in the primary and secondary markets from next months. Spreads on covered bonds issued by weaker European banks and nations started rising even before the end of the original programme.

Covered bonds are debt securities backed by cash flows from mortgages or public sector loans, which investors have a preferential claim in the event of a default. They are increasingly being used in the marketplace as a funding instrument, along with savings deposits and mortgage-backed securities.