ECB seeks to lend out more bonds in euro zone to prevent market freeze

Market - Himanshu Gill - Nov 30,2016

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ecb seeks to lend out more bonds in euro zone to prevent market freeze

The European Central Bank (ECB) is reportedly, searching for ways to lend more of its huge pile of government debt to avoid a freeze in the 5.5 trillion euro short term funding market that supports the financial system.

The ECB currently holds more than a trillion euros ($1.06 trillion) of euro zone government bonds that it took to support the economic growth and inflation rate in the EU.

This has done away with one of the key requirements for repurchasing agreements, or repos, that facilitates lending between financial firms against collateral securities, normally with government bonds with high rates such as Germany.

Lack of control over such collaterals has led to euro zone’s short term funding markets becoming more fragile. This could freeze the repo activities causing an obstruction in lending between financial companies which may lead to sharp falls in bond markets.

To avert such a situation, the ECB wants to make it easier for banks to borrow the bonds from it. These bonds can then be used as collateral for repo loans. The possible changes that can be implemented are-reducing charges for firms that fail to return borrowed bonds on time, accepting new forms of collateral or extending the time duration of loans.

ECB is set to meet on 8th December and it is likely to make a decision on bond lending. This decision will also depend upon what changes the ECB proposes for its asset purchase program.

Germany being the largest country under the monitoring of ECB, could turn up as the most affected region. ECB now owns more than a quarter of all outstanding German bonds. This is building pressure on investors as they face increased demands to put up liquid collateral or cash against their derivative positions.