More on ECB and Junk

September 30th, 2014 11:49 am | by John Jansen |

This is also from a fully paid up subscriber across the pond. I do not believe he wrote it but he left no identifying marks regarding the source so take with grain of salt.

Via a fully paid up subscriber;

Mario Draghi will push for the European Central Bank to accept bundles of Greek and Cypriot bank loans with “junk” ratings, in an effort to ensure policy makers’ latest attempt to save the eurozone’s economy from economic stagnation is a success.

Mr Draghi, ECB president, will this week unveil details of a plan to buy hundreds of billions of euros’ worth of loans sliced and diced into packages known as asset-backed securities (ABS), along with covered bonds, to revive the region’s ailing recovery and boost lending to credit-starved smaller businesses in the currency bloc’s periphery.

As part of the plan, people familiar with the matter say the ECB’s executive board, headed by Mr Draghi, will propose that existing requirements on the quality of assets accepted by the central bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices, known as senior tranches, of Greek and Cypriot ABSs.

The move would free up billions of liquidity for banks in two of the eurozone’s weakest economies. A senior Greek banker said: “This would have a significant positive impact for the Greek banking system and the Greek economy.” The ECB’s efforts to ease monetary conditions in the periphery were being hampered by the rules on low credit ratings, the banker argued.

However, a relaxation of the rules is likely to face staunch opposition in Germany, fraying the increasingly strained relations between the ECB and officials in the eurozone’s largest economy.

Bundesbank president Jens Weidmann has objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks. Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would strengthen the debate about potential conflicts of interest between the ECB’s role as monetary policymaker and bank supervisor.

As the assets originated in Greece and Cyprus are potentially riskier than those from banks elsewhere in the eurozone, the ECB would compensate by purchasing smaller proportions of these securitisations, according to a Eurosystem official. The move is aimed at making the programme of ABS purchases as inclusive as possible. If supported by the majority of members of the governing council, it would enable the ECB to buy instruments from banks of all 18 eurozone member states.

At present, the ECB only accepts ABSs as collateral in exchange for its cheap loans if they hold a minimum rating of at least triple B, the lowest investment grade rating.

Because the ratings on senior tranches are capped by the sovereign rating of the country where the bank is based, if those rules were to apply to the ECB’s buying plan, the central bank could not accept any securitisations of Greek or Cypriot issuers. Standard & Poor’s rates Greece and Cyprus as single B sovereigns – a sub-investment grade rating. Fitch rates Greece as single B, and Cyprus as single B-minus. Moody’s rates Greece Caa1 and Cyprus as Caa3.

An ECB official declined to comment on Tuesday, saying proposals made to the governing council are confidential.

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