European Central Bank President Jean-Claude Trichet said Europe’s economy has now seen ‘tentative signs of stabilization at very low levels’

European Central Bank President Jean-Claude Trichet said the ECB unanimously agreed on a 60 billion-euro (US$80.5 billion) plan to buy bonds as officials step up their response to the worst recession since World War II.

ECB officials have spent the past months bickering over whether to fight a recession by purchasing assets, with Bundesbank President Axel Weber leading resistance to such a move. The US Federal Reserve, the Bank of England and Bank of Japan have lowered rates close to zero and are already buying bonds, effectively printing money to reflate their economies in a policy known as quantitative easing.

“The ECB surprised in a good way,” said Natacha Valla, an economist at Goldman Sachs Group Inc. in Paris who used to work at the ECB. While “they took a little too long” in announcing it, “60 billion is not insignificant. It’s more than symbolic.”

Eurozone banks account for 70 percent of business financing, a much larger percentage than elsewhere, and the ECB has made it clear it wants them to remain at the center of measures to get credit flowing again.

UBS economist Stephane Deo said: “We indeed agree that securing banks’ funding needs is a crucial task for the ECB.”

The euro rose 0.7 percent against the dollar to $1.3424, climbed 1.7 percent against the yen and strengthened 1.3 percent against the pound. Weber is expected to comment on the rate decision later Thursday.

Covered bonds

Covered bonds, known as Pfandbriefe in Germany, are secured by property loans or lending to public-sector institutions, and differ from mortgage-backed securities because they’re also supported by a borrower’s pledge to pay. They have traditionally been considered among the safest corporate bonds available, allowing lenders to pay less interest.

There were about 1.5 trillion euros of the securities outstanding in the euro region as of the end of 2007, 900 billion euros of which were German, according to BNP Paribas SA.

“Covered bonds were considered as one of the segments of the, I would say, private securities in general that had been particularly touched and more touched than others in terms of impact of financial turbulences,” Trichet said.

Trichet, who refused to exclude further rate cuts, also said there’s evidence that Europe’s economy is improving.

“The latest economic data suggest tentative signs of stabilization at very low levels after a first quarter that was significantly weaker than expected,” Trichet said. “Inflationary pressure has been diminishing as money and credit growth have further decelerated.”

Also Thursday, the ECB said it will offer banks additional funds for 12 months from June to restore confidence in the financial system.

The Frankfurt-based central bank said in a statement on its website that it will launch refinancing operations on June 23, September 29 and December 15. The operations will be conducted at a fixed rate with full allotment.

Source: Bloomberg