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Last week, the ECB pledged to buy reparceled debt known as asset-backed securities as part of a multi-pronged attempt to bolster credit and shore up the flagging euro zone economy.
In the Franco-German paper, dated Aug. 29 and circulated ahead of a meeting of European finance officials in Milan last weekend, France and Germany express broad support for ECB plans to bolster the market but say governments should not subsidise it.
While the uncompromising stance of Germany and France will not stop the ECB from pressing ahead with its plans, it threatens to limit the bank's efforts to build a market that is already small.
Announcing the plan at his Sept. 4 news conference, ECB President Mario Drag had appealed to governments to back his initiative with state guarantees when he said: "It's quite clear that we would buy outright DABS, the senior tranches, and the mezzanine tranches only if there is a guarantee."
The Franco-German report suggests a European regulation to enshrine criteria for "high quality securitization" (HQS), seeking to distance it from the similar packages of U.S. home loans that triggered the financial crash.
"Defining HQS in a European regulation, and having it benefit from differentiated regulatory treatment would undoubtedly be favourable to the development of the securitization market," the document reads. "However, such a regulation ... would not be a silver bullet, and would probably not be enough on its own to get the market off the ground."
The document's authors draw the line, however, at asking governments to guarantee any losses, saying this would warp the new market by making it artificially cheap.
A separate paper dated Sept. 9 prepared by the German and French finance ministers calls simply for "the revitalization of the securitization market in the EU, through high quality securitization".