A pre-emptive strike late on Thursday night against ratings agencies downgrading Ireland below the minimum needed for institutions pledging Irish paper as collateral, on account of the fresh bank capitalisation costs:
The Governing Council of the European Central Bank (ECB) has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Irish government. The suspension applies to all outstanding and new marketable debt instruments. It will be maintained until further notice.
The Irish government is implementing the economic and financial adjustment programme negotiated with the European Commission, in liaison with the ECB, and the International Monetary Fund. The Governing Council has assessed the programme positively. The suspension announced herewith is based on this positive assessment of the programme, the commitment of the Irish government to fully implement it and the Irish government’s decisions of 31 March 2011 to ensure – following its thorough asset valuation exercise – a capital increase totalling EUR 24 billion (out of which EUR 3 billion in the form of contingent capital), for four Irish banks, and to deleverage and downsize the banking sector.
The Governing Council therefore deems debt instruments issued or guaranteed by the Irish government to fulfil the credit standards required for collateral in Eurosystem credit operations. The relevant risk control measures will be reviewed on a continuous basis.
Ireland is rated BBB+ by Fitch, Baa1 by Moody’s, and A- by Standard & Poor’s. Moody’s and S&P are on negative watch.
Actually — could this also be the first step to a lending facility replacing Ireland’s emergency liquidity? Or just to ensure that emergency liquidity won’t grow even bigger for the ECB to pick up later?
Why we think it could be that first step: in addition to allowing Ireland’s banks to continue repo’ing government-guaranteed instruments in normal ECB operations, it effectively makes it somewhat easier for the ECB to accept even a sub-investment grade Irish government guarantee on any new lending facility.
Of course, we’re sure that the ECB in fact is hoping to forestall the very prospect of a new lending facility by ensuring access to normal ops is maintained using this waiver — but we’d simply wonder if the above could be a potential loophole.
Thoughts?
And of course, we’ve been here with Greece before.
Related links:
Ireland: does the fire sale start here? – FT Alphaville
Of FARTs and fire sales – FT Alphaville
Ratings don’t kill sovereigns, ratings users do - FT Alphaville
