The ECB's latest tonic

By the time this issue has reached desks, details of the European Central Bank's EUR60 billion intervention in the European covered bond market will have been made public (see features, p. 12 and p. 18). Even without information as to where and how this money will be spent, the Bank's original announcement merely saying that the capital had been set aside had a restorative effect on what had been a somewhat depressed market, with 14 benchmarks priced in three weeks, three of them in the Spanish cedulas sector, which had been closed for almost a year.

The plan is already an indicator of the galvanising effects of quantitative easing on markets, but the devil could yet be in the detail for the ECB. First, its commitment is to provide liquidity to covered bond markets in the euro area. So far so equable, one might say, but only until one remembers that in previous years new issuance of covered bonds has easily exceeded double the amount promised by the Bank.

Also, how is it to decide on which jurisdictions will benefit, or if equal amounts of liquidity will be made available in each country that has adopted the euro? The most established covered bond markets, like France and Germany, and thus the ones that are likely to have the biggest effects on the market as a whole, might appear to be the most deserving recipients. Yet they have proved the most resilient, so why not devote funds to large markets that find themselves struggling, such as Spain? But if the Bank does that, what about those countries struggling to establish a covered bond programme, like Italy? Yet again, the apparent virtues of supranational cooperation in the economic sphere in Europe could founder on the political realities.