As goes Europe’s central bank, so go financial markets?
The ECB decided last week that it would drop its minimum rating requirements for Portuguese collateral, after credit rating agency Moody’s downgraded the eurozone peripheral four notches to Ba2.
Which has Bernd Volk, Deutsche Bank’s head of covered bond research, thinking. As a reminder, covered bonds (like ECB collateral once was) are rather dependent on the ratings of their issuing domiciles…
Given severe rating consequences for Portuguese covered bonds resulting from the downgrade of the sovereign bonds by four notches to Ba2 and also other peripheral covered bonds facing subinvestment grade risk (e.g. Greek covered bonds by Fitch in case of Greek sovereign debt rollover), we suggest a significant “Rating deleveraging” of the financial system, i.e. less use of rating requirements in laws, regulatory requirements, bond prospectuses and other contractual agreements. Instead so-called “indeterminate legal terms” (“unbestimmte Rechtsbegriffe”), to be determined by the respective institution of market participant, could be used.
Unbestimmte Rechtsbegriffe, ‘stead ratings. How very interessant…
Related links:
Portuguese covered bonds and collateral damage – FT Alphaville
The solution to all the ECB’s problems, by Goldman Sachs – FT Alphaville