THE European Central Bank (ECB) began buying corporate bonds yesterday, hoping to convince companies to borrow and spend, in its latest effort to revive rock-bottom inflation in the eurozone.

    Adding investment-grade euro credit to its 1.74 trillion euros (US$1.97 trillion) in asset purchases, the ECB hopes to cut borrowing costs even more. That would give companies incentive to invest, fuelling faster growth in the bloc, still struggling to overcome the last stages of its debt crisis.

    The program will face serious obstacles. The market for such debt is worth 500 billion to 600 billion euros, but it is largely limited to big companies in France and the Netherlands. They already enjoy easy access to credit, so their interest in the cheap cash may be limited.

    Success will largely depend on the ECB’s ability to attract new borrowers and on cheaper borrowing costs trickling down to weaker economies like Italy’s and Spain’s, where costs remain high.

    “At this stage, the ECB itself is probably not sure how much it will be able to buy,” Deutsche Bank analyst Michal Jezek said. “For example, we could see some strong months with 9 to 10 billion euros of purchases and others, such as August, with say 1 to 2 billion euros, with most months somewhere in between.”

    Jezek expects record euro debt issuance this year, with 250 billion euros in gross and more than 100 billion in net sales. About half the net figure will come from eurozone corporations, responding to the ECB’s purchases.

    The ECB will not set purchase targets and is likely to start slow, prepared for big fluctuations and ramping up over time. It will hope to buy 5 billion to 10 billion euros a month if it succeeds in inducing fresh issuance, sources close to the ECB said earlier.

    If meaningful new issuance fails to materialize, volumes may be limited. Some eurozone sources argue that buys might hold between 2 billion and 3 billion euros per month.

    The ECB is buying 80 billion euros in assets, mostly government debt, per month, at least until March 2017. But the failure of inflation to accelerate is expected to force the bank to extend the purchases. That would increase the risk it would struggle to find assets to buy, running into liquidity shortages or the constrains of its self-imposed limits.

    Although analysts expect the ECB to be heavily involved in the primary market, its commitment to buy proportionally to outstanding issues will force it to also buy in the secondary market. (SD-Agencies)