UPDATE 3-Nowotny not sure ECB's plan for asset-backed securities would fly

Wed Jul 16, 2014 11:01am EDT

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(Adds Knot pressing France and Italy to reform)

By Paul Carrel

FRANKFURT, July 16 (Reuters) - A European Central Bank policymaker cast doubt on Wednesday on whether the ECB will go ahead and buy asset-backed securities - trumpeted last month as a possible measure to help revive the euro zone economy.

The ECB, which announced a barrage of measures in June to pump money into the sluggish euro zone economy, has said it is stepping up preparations to buy ABS in future, which it sees as a way to help channel funding to smaller businesses in the bloc.

Ewald Nowotny, a member of the ECB's policymaking Governing Council, said the central bank was looking with an open mind at the possibility of buying ABS, but was not certain to go ahead.

"I'm not sure this thing would fly," he said during a question and answer session after giving a lecture at Frankfurt University.

Asset-backed securities are created by banks pooling loans such as mortgages or car loans into an interest-bearing bond that is sold to raise funds. The market has not recovered following the global financial crisis, which was triggered by doubts about the quality of assets in supposedly rock-solid U.S. mortgage-backed securities.

The ECB and Bank of England are trying to foster a revival of securitisation in Europe, and Nowotny's remarks appeared to cut across the message given by some other ECB policymakers.

Yves Mersch, a member of the Executive Board that forms the core of the ECB's 24-member Governing Council, said last month that "there is a growing consensus that an instrument once seen as part of the problem could in fact be part of the solution".

NEW NORMAL

Nowotny also said on Wednesday that the ECB must pursue an active policy stance to address low growth and inflation in the euro zone, even though it recognises there is a risk of asset price bubbles forming as a side-effect.

"The 'new normal' is a situation where we have low economic growth, low inflation, but also for the banks lower profitability, lower asset quality and less short-term funding," he said.

"I think this is a situation that will stay with us for quite some time," added Nowotny, whose role as Austrian central bank chief gives him a seat on the ECB's Governing Council.

The ECB cut interest rates to record lows last month as part of the package of measures to breathe life into a sluggish euro zone economy, where inflation is running far below the central bank's target and there is a dearth of credit to smaller firms.

Another ECB Governing Council member, Dutchman Klaas Knot, pressed home the central bank's call for governments to do more to shape up their economies.

"In countries like France and Italy the reform tempo is too low still," Knot told RTL television.

"Markets are volatile, there are enormous capital flows each day from one location to another. If we don't learn enough lessons from the previous crisis you can't exclude there being another crisis," Knot added. (Additional reporting by Thomas Escritt in Amsterdam; Editing by Catherine Evans and Susan Fenton)

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