ECB Confirms Bond Purchasing Programme But It's Not Enough, Say Analysts

The European Central Bank (ECB) has confirmed that it bought €1.704bn ($2.16bn, £1.34bn) in covered bonds last week in an effort to get more liquidity to Eurozone banks.

However, analysts have warned that it must up the pace of its programme significantly if it is to return to its target balance sheet level of €1tn.

Purchases began on 20 October. This is the third time in the past six years the ECB has resorted to bond purchases to alleviate the threat of deflation, amid anaemic levels of demand in the Eurozone.

The bank's president Mario Draghi confirmed at a press conference in Frankfurt on 27 October that last week's leak suggesting the bank had recommenced its stimulus package had come from the ECB itself.

The bank is said to want to expand its balance sheet to €1tn (its approximate size in 2012), meaning that this is the beginning of its expansionary campaign. However, analysts warn that there may be insufficient securities available for purchase.

The ECB is set to diversify its purchases to include asset-backed securities and is reported to be considering launching a corporate bond purchasing programme in December.

However, German opposition to the purchase of sovereign bonds may restrict the bank's ability to operate within that asset class. And the pace and volume of the purchases have been dismissed as being disappointing by some.

Reuters quotes an ECB insider as saying: "Some people know that this (the current purchase plan) will not work. It's too small and the problem is much, much bigger."

All eyes have been on Frankfurt since 24 October, when a document leaked to Bloomberg suggested that 25 Eurozone banks had failed the ECB's stress tests – an evaluation of their ability to deal with financial crises.

Over the weekend, the ECB confirmed that the figure was 24, with European's oldest lender – the Italian bank Monte dei Paschi di Siena – among those to have failed. However, most analysts were aligned on the view that while the outcome could have been worst, immediate action is required from ECB policymakers.

The ECB says it is confident that its policies will bear fruit, with a spokesperson saying: "The targeted long-term refinancing operations (TLTRO) and the purchases of ABS and covered bonds have to be seen as a package. The overall impact of these three measures on the balance sheet size of the Eurosystem will be sizeable."

The stress tests, however, revealed the sizeable hole in the finances of many European banks and, given the fragility of area's economy, pressure is mounting on the ECB to act quickly.

Salman Ahmed, global fixed income strategist at Lombard Odier Investment Managers, said: "Today's news is both worrying and reassuring, but not in equal measure. On the face of it the capital shortfall highlighted by the comprehensive review process – around €9bn – is way below the €30bn to €50bn that was expected."

Dale Stevens, the head of risk at business analysis firm SAS, echoed those concerns: "The fact that 24 banks failed suggests that the stress tests were more about relative rank than any measure of a bank's absolute ability to survive the adverse 2016 scenarios specified. Given the approximations within the methodology employed, and the fact that the deflation scenario was overlooked, there remains a degree of concern about the model risk inherent in these tests.

"Everyone will be looking hard to decide whether the €9bn is too little to shore up the banks that are at risk. The good news is that the review process is fully transparent. Investors have been handed plenty of data on the banks' assets and are now in a position to judge for themselves."