ECB Eyes Corporate Bonds

Central Bank Mulls Asset Purchases on Secondary Market By NINA KOEPPEN and JOELLEN PERRY FRANKFURT -- The European Central Bank could start buying corporate bonds in an unorthodox move to support the euro-zone economy, policy makers said Thursday. ECB Vice President Lucas Papademos said that risk-averse banks are denying credit to companies and consumers, and that is contributing to the economic downturn. Reuters Lucas Papademos said the ECB may buy corporate bonds on the secondary market. He told a conference in Brussels that the ECB may decide to buy corporate bonds on the secondary market to help ease companies' financing problems, and will also consider extending the maturity of its lending to banks beyond six months. "It may be warranted that the central bank purchase private-sector bonds in the secondary market," Mr. Papademos said. His comments are the strongest signal yet as to how the ECB could ramp up its efforts to keep funds flowing through clogged euro-zone credit markets. The remarks indicate that policy makers are prepared to take more-aggressive steps. Up to now, the ECB has concentrated its efforts on keeping euro-zone banks flush with funds. But the ECB has been criticized by private-sector economists and businesses for its reluctance to follow major central banks -- including the U.S. Federal Reserve and the Bank of England -- in buying assets. Mr. Papademos's comments are an indication that policy makers now believe more drastic steps may be needed. It remains unclear how the ECB would finance such action. It could buy the bonds using freshly created money, a process known as quantitative easing. Figures released by the ECB Thursday showed the extent of the problem. Lending to businesses fell by €4 billion ($5.4 billion) in February from January, the second drop in three months, the ECB said. The ECB has cut interest rates by 2.75 percentage points since October, and it is widely expected to lower its key rate by a half point, to 1%, at its April 2 policy meeting. Economists say rate cuts alone won't be enough to get euro-zone economies going. Unlike the Fed and the BOE, the ECB so far hasn't increased the money supply by buying government bonds and other securities. Ivan Sramko, another governing-council member and Slovakia's central-bank chief, said Tuesday that a decision about expanded use of unconventional policy measures could come within a month. There is a continuing debate about a more intense use of unconventional policy measures, including asset purchases, he said. "Clearly these are just ideas at this stage, but it does show that the ECB is at least considering all of its options," said Gary Jenkins, head of fixed-income research at Evolution Securities in London. The ECB so far has shied away from buying debt securities directly, but European Union business groups have called on the ECB to start buying short-term corporate debt, known as commercial paper, to soothe companies' funding problems. The ECB is prohibited by statute from funding the governments of the euro zone's 16 nations by directly purchasing their debt instruments, shutting it out of the option taken by the Fed. But the ECB could buy such government bonds in the secondary markets, as the risk premiums some countries pay on their debt have increased sharply. Those countries include Ireland, Greece and Portugal, which all have large budget deficits. The news emerged as new data underlined the dire state of Europe's economy. Housing starts in Spain fell 42% last year to 360,044, less than half the peak level of 2006, when Spain built more houses than in France, Germany, Italy and the U.K. combined. In the U.K., the euro-zone's largest export market, retail sales fell 1.9% in February from January. —Adam Cohen in Brussels contributed to this article. Write to Nina Koeppen at nina.koeppen@dowjones.com and Joellen Perry at joellen.perry@wsj.com