FRANKFURT (Reuters) - The European Central Bank has dropped its minimum ratings threshold for accepting Greek bonds as collateral, meaning banks can exchange the bonds for central bank cash even if ratings agencies announce further downgrades.
It is the second change to the ECB’s collateral rules in less than two months as Greece’s fiscal situation and market sentiment toward the country has deteriorated.
Banks wanting to borrow money at ECB liquidity operations must deposit assets with their local central bank as insurance. These include bonds, securities and packages of loans.
In general, the ECB accepts debt rated as low as BBB- by at least one ratings agency, having extended a temporary relaxation of the threshold that was supposed to run out at the end of this year. From January next year, private sector debt rated BBB will face a new scale of haircuts.
The latest change means the ECB will always accept Greek sovereign debt, no matter what the country’s credit ratings are.
As a risk protection measure when calculating how much a bank can borrow in exchange for some sorts of assets, the ECB does not take the full market value of the asset but subtracts a percentage, known as a haircut. So a bank which lodges debt with a market value of 100 million euros would receive 95 million in liquidity in exchange if a 5 percent haircut applied.
The ECB currently has a sliding scale for assessing the riskiness of assets, with sovereign bonds at one end and asset-backed securities at the other. The range of base haircuts goes from 0.5 percent to 20 percent, with add-ons of as much as 10 percent. Any debt rated in BBB territory has an extra haircut of 5 percent at the moment and from January 2011, non-government debt in this category will attract a graded scale of haircuts. The ECB takes the highest available rating to calculate the haircut.
Greek government debt is currently rated as junk (BB+) by Standard & Poor’s and triple B- by Fitch. Moody’s rates it marginally higher at A3 and it is this rating which, as the highest of the three, determines the haircut.
Greek bonds with a fixed coupon currently attract a risk margin ranging from 0.5 percent for maturities of less than a year to 5.5 percent for more than 10 years. For zero coupon bonds, the maximum base haircut is 8.5 percent.
This will not change unless Moody’s downgrades Greece to BBB territory, when an extra 5 percent haircut will apply on top of other haircuts. But private debt rated at this level will potentially face an even higher haircut - a bonus for Greece.
The ECB has not specified haircuts for Greek debt rated below BBB-.
The ECB will announce details of the new haircuts applying to private sector, BBB-rated debt in July. But it said they would be at least as high as the 5 percent extra haircut which currently applies to all BBB-rated debt. The haircuts will depend on maturity and liquidity as well as rating. The lowest will apply to the most liquid assets with the shortest maturities, while the highest will apply to the least liquid assets with the longest maturities.
From January next year, the ECB will no longer accept assets denominated in U.S. dollars, UK pounds and Japanese yen. They will also stop accepting debt instruments issued by credit institutions traded on non-regulated markets, and subordinated debt instruments protected by guarantees.
Last year euro zone banks submitted on average just over 2 trillion euros worth of assets as collateral. Asset-backed securities made up 23 percent, uncovered bank bonds 28 percent and non-marketable assets 14 percent. Government debt made up just 11 percent of the assets used.
The ECB says about 76 billion euros (3.8 percent) of the 2 trillion euros of collateral put forward by banks was as a result of the then-temporary changes to allow assets including BBB-rated and foreign currency debt.
Compiled by Krista Hughes and Marc Jones; editing by Stephen Nisbet