ECB to buy covered bonds

By Natalie Harrison and Jane Baird

LONDON (Reuters) - The European Central Bank said on Thursday it would buy around 60 billion euros (53.5 billion pounds) of covered bonds and lend banks unlimited funds for up to 12 months among unconventional moves to unlock bank lending in the region.

President Jean-Claude Trichet also announced that the European Investment Bank, the EU's long-term lending arm, would be allowed access to ECB funding by taking part in the central bank's money market operations.

Trichet said the decision in principle to purchase euro-denominated covered bonds from euro zone banks did not amount to "quantitative easing," a term that refers to ways of increasing the money supply.

"The idea is to revive a market which has been very heavily touched, and all that goes with the survival of the market including spreads, liquidity and the depth of the market," he told a news conference. "We are not at all embarking on quantitative easing."

Covered bonds are backed by a pool of assets such as mortgage loans that remain on a bank's balance sheet. They are seen as safer than other bank bonds, because they give investors a claim on the bank itself and on the assets as well.

"Happy days are here again," said Ted Lord, managing director at Barclays Capital.

The move "is a very effective approach towards healing the financial markets in the euro zone. A healthy covered bond market supports two key areas necessary for economic recovery: the housing market and public sector infrastructure," he added.

Trichet said the ECB had focussed on covered bonds because they had been particularly hard hit by the financial crisis.