Greece-watchers will know that Thursday was a tough one for Hellenic Republic debt.
That was despite a report from ratings agency Standard & Poor’s, which some analysts have described as an attempt to reassure a jittery market. Indeed, in the report S&P notes that only 6.1 per cent of sovereigns with an S&P BBB-rating have defaulted on their debt in the past 15 years — the implication being that market worries over Greece may be exaggerated.
But this bit from the report, about Greek bonds’ eligibility as collateral for the European Central Bank’s (ECB) liquidity operations, caught our eye:
EU law prohibits the granting of ECB (AAA/Stable/A-1+) credit or overdraft facilities to any EMU member state. Nevertheless, we expect the ECB to continue to directly support Eurozone financial sector liquidity needs. On Oct. 15, 2008, the ECB loosened its criteria for assets eligible to be used as collateral for Eurosystem credit operations, indicating that the Eurosystem’s Credit Quality Threshold (ECQT) would be those assets rated investment grade (‘BBB-’ or above), rather than those assets with a “single A” credit assessment (‘A-’ or higher). The ECB has since indicated its intention to gradually remove the extraordinary support provided to Eurozone financial institutions, and as part of that process is expected to return the ECQT to ‘A-’ at the end of 2010. According to the ECB, assets can meet the ECQT if at least one of four External Credit Assessment Institutions, including Standard & Poor’s, views creditworthiness as consistent with the eligibility criteria floor. Currently, the government debt of all EMU sovereigns would thus remain eligible as collateral in Eurosystem credit operations even if the ECQT floor were revised back to ‘A-’. Although Standard & Poor’s rates Greece ‘BBB+/Watch Neg/A-2′, one of the other External Credit Assessment Institutions currently rates Greece with a “single A” credit assessment.
Another External Credit Assessment Institution?
That would be Moody’s — currently the outlier in terms of sovereign ratings agencies. Moody’s has Greece at that all-important A-level (A2 to be precise), where S&P and Fitch have it at BBB+.
Anyway, S&P thinks even if Moody’s did downgrade the Hellenic Republic, it wouldn’t necessarily mean (another) downgrade at S&P. Though the agency does say Greek debt is currently trading more like ex-eurozone bonds already:
In any case, even if a Eurozone sovereign were to lose eligibility for ECB funding, we would not expect this would have an impact on the sovereign credit rating (see “Change Of ECB Open Market Operations Will Not Affect Eurozone Sovereign Ratings,” published Nov. 9, 2005, on RatingsDirect). Although we believe market confidence would undoubtedly be hit, as long as the withdrawal of eligibility at the ECB window did not come as a surprise, we expect it would be discounted by the market before the withdrawal occurs. If a sovereign were to become ineligible for ECB liquidity, its sovereign bonds might be expected to trade at levels similar to other non-Eurozone, EU sovereigns. In our observation, given that Greek sovereign bonds have been trading closer to those of Hungary and Bulgaria, this might suggest that the market is already factoring in such an event, in which case spreads might not widen much further should access to ECB liquidity be withdrawn.
Full report in the Long Room.
(H/T Gary Jenkins at Evolution Securities)
Related links:
Moody’s joins S&P in warning on Greece - FT
Moody’s whip hand over Greece, redux – FT Alphaville
How do you say vicious circle in Greek? – FT Alphaville
Hidden data on Greek bonds take on greater significance – Gillian Tett, FT