ECB's Praet urges governments to rethink support for ABS

Peter Praet, the European Central Bank's chief economist, made a fresh attempt to gain the backing of euro zone governments for one of the ECB's key stimulus steps, to maximise its impact, saying some had been too quick to dismiss its proposal.

While economic recovery is in full swing in the United States and the central bank there has started to withdraw its support, the ECB has stepped up its efforts to unblock lending to companies and boost growth, for example by buying repackaged loans.

As part of its stimulus, the ECB plans to buy top tranches of certain asset-backed securities (ABS). The central bank said it would also ‎buy riskier parts if governments guaranteed them, but that idea was swiftly rejected by France and Germany.

"I think this avenue should be considered by governments," ECB Executive Board member Praet told Reuters in an interview conducted on Thursday, referring in particular to redirecting existing support for small- and medium-sized enterprises (SMEs).

"We weren't suggesting governments to reinsure the whole market for mezzanine tranches, but to target SMEs lending. The amounts are not that important, considering also that existing facilities, which in some cases are not even used, can be tapped," Praet said.

Such support would make the ECB's efforts more effective in reviving the sector that accounts for a large part of the euro zone economy, which stagnated in the second quarter.

Such weakness was reflected in the relatively weak euro exchange rate, Praet said, rebuffing criticism the ECB was trying to push down its own currency.

"What is happening in the currency market is in line with fundamentals," Praet said, reiterating that the ECB does not have an exchange rate target. "The U.S. has recovered more strongly and we have weak conditions here."

GETTING BANKS TO LEND

Praet was speaking shortly after the euro zone's banks showed lower than expected interest in the ECB's first offer of four-year loans - targeted long-term refinancing operations, or TLTROs - that form another key pillar of its stimulus, which it hopes will coax reluctant banks to lend more.

The lacklustre take-up raised speculation in the market the ECB may have to consider buying additional assets, possibly sovereign bonds, to make its stimulus work. Praet said it was too early to draw such conclusions.

Banks will have another opportunity to tap the loans in December. Even if demand remains low, the ECB can spend as much as necessary on ABS and covered bonds to get lending going.

"We have emphasised that the combination of measures announced between June and September will have a sizeable impact on the balance sheet," Praet said.

ECB President Mario Draghi said earlier this month the ECB aimed to steer the size of its balance sheet towards levels seen in early 2012. That was around 3 trillion euros, compared with 2 trillion euros now.

The ECB has not said how much it wants to spend on ABS and covered bonds, but Reuters reported earlier this month that initial plans foresaw up to 500 billion euros.

The ECB will detail its plans at its October policy meeting.

Some analysts have criticised the plan, saying it would fail to free capital on banks' balance sheets if the ECB sticks to only buying the senior and most secure ABS tranches, leaving the riskier parts with the bank.

But Praet said banks would benefit nonetheless as the programme affects their leverage ratio, which restricts banks' total assets to a given multiple of their equity.

"We have to keep in mind that a number of banks are leveraged constraint, not necessarily risk-weighted constrained," Praet said. "If they can get rid of senior tranches and they will not have gains on capital, they still improve their leverage ratio."

(Editing by Larry King)