The European Central Bank may accept bonds that have become “rotten”.
–
The European Central Bank (ECB) announced Wednesday that it will be able to accept degraded bonds in the “rotten” category as collateral for loans to banks, a new measure intended to support the European financial system in the midst of the coronavirus crisis.
The purpose of the new rules is to support the ability of banks to lend to “continue to provide financial resources for the economy of the euro area,” the ECB said in a statement.
For an issuer, public or private, whose debt had sufficient quality on April 7, the ECB will actually freeze this appreciation and thus neutralize in advance a possible explosion of downgrades by rating agencies.
The fact that certain titles may be lower rated in the future and fall into the category of “speculative” – or “rotten” (junk) in common language – due to the crisis should not therefore exclude them from being used in operations refinancing.
“Grandpa” clause
This so-called “grandfather” clause, valid at least until September 2021, must defuse the risk for many companies who fear to fall into it, becoming what the market calls “fallen angels” and see investors turn their backs on them.
This also applies to sovereign bonds. For the markets, it is primarily Italian debt, which continues to widen and which is threatened in the long term to fall into the “speculative” category, being noted only two notches above.
In its press release on Wednesday, the ECB does not mention the fate of bonds that have become rotten as regards their eligibility for asset purchases by the Frankfurt institution on the market, the famous “QE” revived at the end of 2019 and still muscular lately to support the economy.
Debt redemptions
This may be the subject of future decisions, the ECB saying it is ready for “further measures, if necessary, to continue to ensure the smooth transmission of its monetary policy” within the euro area.
Coded language that suggests an easing of the rules around debt buyouts is coming, says a source in the entourage of the ECB.
–
