European Central Bank President Mario Draghi is set to push the ECB to buy junk-rated Greek and Cypriot bank loans, a move that may increase tensions between Germany and the bank, the Financial Times reported.
The central bank’s executive board will propose that current requirements on the quality of assets accepted by the bank be relaxed to allow the ECB to buy repackaged debt, or safer slices of Greek and Cypriot asset-backed securities, the FT reported, citing people familiar with the matter.
If the proposal is accepted by a majority of the ECB’s governing council, the central bank will be able to buy investment instruments from all 18 euro zone member states, the newspaper reported.
The European Central Bank declined to comment.
Draghi is expected to give details of ECB plans to buy asset-backed securities and covered bonds when the bank’s governing council meets in Naples, Italy on Thursday.
As part of its stimulus, the ECB plans to buy top tranches of certain asset-backed securities. The central bank said it would also buy riskier tranches if governments guaranteed them, an idea swiftly rejected by France and Germany.
“I think this avenue should be considered by governments,” ECB Executive Board member and Chief Economist Peter Praet told Reuters in an interview earlier this month.
Deutsche Bundesbank’s president, Jens Weidmann, sits on the ECB’s governing council but does not hold any veto rights. Germany may continue to oppose the proposal but may be outvoted if other eurozone members choose to back it.
The ECB is obliged to issue funding to banks that offer asset-backed securities that are eligible under its collateral framework. But under the asset-backed securities buying plan, the ECB would retain discretion over purchases even if it was willing – in principle – to buy paper with a lower rating than would qualify for collateral at its funding operations. [Reuters]