ONCE again, Mario Draghi failed to deliver full blown QE or ‘quantitative easing’ — massive asset purchases meant as the equivalent of fixing rocket boosters to the eurozone’s economy.

Instead, the European Central Bank president yesterday announced ‘ABSPP’ and ‘CBPP3’ — asset backed securities and covered bond purchasing programmes (the covered bond plan was its third since 2009).

Alas, neither had the same ring as QE, which in the US and UK saw central banks buying vast quantities of government bonds. But that does not mean the ECB’s latest moves, which also included another cut in official interest rates, should be dismissed too quickly. The euro’s steep slide shows Mr Draghi still has considerable sway over markets.

The risk is that ECB measures to boost growth and raise inflation pressures are too slow to prevent the eurozone falling into a dangerous deflationary slump. If the problem facing European SMEs is a lack of demand, cheaper loans may not make much difference

Unlike US Federal Reserve QE, which worked largely by simply being brash with big headline numbers, the ECB plans are subtle, yet arguably better suited to the eurozone’s diverse economies and political systems.

The ABS programme will take it significantly closer to providing credit direct to the real economy, relieving the burden on weakened banks. The central bank could also end up spending big sums on ABS — Mr Draghi gave no target — giving the programme a distinct QE feel.

Since Mr Draghi hinted at last month’s central bankers’ summit in Jackson Hole, Wyoming, at fresh ECB action, debate has raged about whether eurozone QE would actually work. Sure, financial assets would rise in price. But QE doubters on the ECB’s governing council ask what is the point of driving historically low corporate or government bond yields even lower? The eurozone economy’s problem is not a lack of liquidity in its financial system; it is the lack of demand.

More creative minds in Europe’s capital markets suggest, half-seriously, that Mr Draghi would be better issuing 1,000 euros cheques to every eurozone citizen to spend — which would also boost popular support for the eurozone (and maybe encourage Scots wishing for independence to back euro membership?) We are not there yet.

Against that background, Mr Draghi secured a ‘comfortable majority’ on the ECB’s council for measures that should help the sector where he sees the greatest need for credit support: job-creating small and medium-sized enterprises, especially in stressed economies on the eurozone’s southern periphery.

At first glance, an official ABS purchase scheme might seem to be of dubious benefit — even reckless. Securitised US subprime mortgages, after all, tipped the world into financial crisis in 2007. Since then, the market has slumped. Only about 100bn euros of ABS backed by SME loans is outstanding in Europe, so it would appear there is little to buy.

Moreover, significant regulatory hurdles remain to expanding ABS — the legacy of the US subprime mess — which Mr Draghi admitted he had yet to have removed.

The ECB president hinted, however, that his ABS programme would be turbocharged. While the ECB would look to buy simple and transparent products, these could include residential mortgage-backed securities. That will significantly expand the pool of assets available.

What was more, Mr Draghi said the ECB would buy riskier ‘mezzanine’ tranches of ABS if they were backed by guarantees. That is more important than it might seem. The ECB worries about taking too much risk on to its own balance sheet but its top policymakers believe eurozone governments could expand guarantee schemes significantly, for instance via development banks, further increasing the pool of assets it could buy.

The idea is far from outlandish. The US securitisation market is underpinned by Fannie Mae and Freddie Mac, the government backed mortgage companies.

Germany also used similar guarantees to encourage investment in eastern Germany after the country’s reunification — although some of the investments proved unwise. Mr Draghi might also have had such guarantees in mind when he suggested in Jackson Hole that fiscal policies could be used more flexibly to boost eurozone growth.

A big snag with an ABS programme is that it will take time to implement and its effects are likely to be gradual. The risk is that ECB measures to boost growth and raise inflation pressures are too slow to prevent the eurozone falling into a dangerous deflationary slump. If the problem facing European SMEs is a lack of demand, cheaper loans may not make much difference. But Mr Draghi’s options are limited and as Matt King, strategist at Citigroup argues, an ABS purchase programme would ‘seem to have a better chance of success than pretty much anything else you might try’.

If it doesn’t work, there are always those cheques.

Published in Dawn, Economic & Business, September 8th, 2014