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France and Germany oppose guarantees for ECB debt-buy plan - document

(Reuters) - France and Germany oppose granting government guarantees to support the market for repackaged debt, a document seen by Reuters shows, dealing a set-back to the European Central Bank's plans to rejuvenate it.

Last week, the ECB pledged to buy reparcelled debt known as asset-backed securities as part of a multi-pronged attempt to bolster credit and shore up the flagging euro zone economy.

In the Franco-German paper, dated Aug. 29 and circulated ahead of a meeting of European finance officials in Milan this weekend, France and Germany express broad support for ECB plans to bolster the market but say governments should not subsidise it.

While the uncompromising stance of Germany and France will not stop the ECB from pressing ahead with its plans, it threatens to limit the bank's efforts to build a market that is already small.

Announcing the plan at his Sept. 4 news conference, ECB President Mario Draghi had appealed to governments to back his initiative with state guarantees when he said: "It's quite clear that we would buy outright ABS, the senior tranches, and the mezzanine tranches only if there is a guarantee."

The Franco-German report suggests a European regulation to enshrine criteria for "high quality securitisation" (HQS), seeking to distance it from the similar packages of U.S. home loans that triggered the financial crash.

"Defining HQS in a European regulation, and having it benefit from differentiated regulatory treatment would undoubtedly be favourable to the development of the securitisation market," the document reads.

"However, such a regulation ... would not be a silver bullet, and would probably not be enough on its own to get the market off the ground."

The document's authors draw the line, however, at asking governments to guarantee any losses, saying this would warp the new market by making it artificially cheap.

"(A)n intervention in the form of a public guarantee scheme would be problematic as investors could be tempted to rely on the guarantee rather than to conduct their due diligence by examining the transaction and underlying assets," it said.

The ECB announced plans last Thursday for an asset-backed securities (ABS) and covered bond purchase programme to help ease credit conditions in the bloc.

Asset-backed securities are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now even the ECB.

In a speech in Milan late on Thursday, Draghi said governments should consider providing public guarantees for ABS to help support lending to smaller firms.

A separate paper dated Sept. 9 prepared by the German and French finance ministers calls simply for "the revitalisation of the securitisation market in the EU, through high quality securitisation".


(Editing by Jeremy Gaunt)