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ECB Loosens Terms on Its New Covered Bond Purchase Program

November 04, 2011

(Adds analyst comment in third paragraph.)

Nov. 3 (Bloomberg) -- The European Central Bank is relaxing the terms on its new 40 billion-euro ($55 billion) covered bond purchase program by accepting lower-rated securities than under a similar plan in 2009.

The ECB will buy covered bonds with the lowest investment- grade ratings under the new program, according to a statement in the Frankfurt-based bank’s web site today. That’s five steps below the minimum grade the ECB required two years ago under its 60 billion-euro program to purchase the loan-backed debt.

The ECB’s covered bond purchase plan is part of its efforts to improve banks’ access to market funding and spur lending. Covered bond yields soared 45 basis points this year to 172 basis points more than the swap rate, according to Bank of America Merrill Lynch’s EMU Covered Bonds index, amid concern banks’ will need to write down investments in peripheral euro- region countries.

“The lowering of the rating to BBB- is a clear signal that the peripheral markets will benefit from purchases,” said Leef Dierks, a London-based analyst at Morgan Stanley.

ECB will buy covered bonds from issues of at least 300 million euros, down from the 500 million-euro minimum under the 2009 program. The purchases will start this month and the program will be completed by October 2012, the ECB said in the statement. The central bank will target bonds with maturities of as long as 10 1/2 years.

The purchases will be in the primary and secondary markets, and across the euro area. Covered bonds must be eligible for use as collateral in credit operations in order to be qualified for purchases, according to the statement.

Covered bonds are secured on mortgages or public-sector loans and guaranteed by the issuer.

--Editors: Andrew Reierson, Michael Shanahan

To contact the reporters on this story: Esteban Duarte in Madrid at Simone Meier at

To contact the editor responsible for this story: Paul Armstrong at

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