The European Central Bank president, Jean-Claude Trichet said the central bank would only accept highly-rated sovereign bonds as collateral for its financing operations. Countries, whose debt rating of the government below is below single A-, would have their bonds rejected as collateral.
This announcement, which is applicable to government bonds that the ECB takes from private banks as collateral, will affect governments whose budget deficits are out of control.
These debt ratings are given by Standard & Poor's, Moody's or the Fitch ratings agencies.
These rules, ECB has insinuated, will affect like Greece and Italy, whose credit ratings have fallen and are unable to be rectified.
Though Greece's rating with Standard & Poor's is currently A, Italy's languishes behind with its S&P rating of AA-minus.
Rob Carnell, an economist with ING Baring said: “This change is unlikely to hit anyone immediately, but Greece is more clearly in the crosshairs than any other countries.”
This proposal is will have a long-term impact, feel analysts. Erik Nielsen, chief European economist at Goldman Sachs said: "While this policy may have little direct impact in the short term because even the lowest rated member remains three notches above the cut-off, it is a huge development and has potentially substantial and positive implications longer term . . ."
European countries slacking on the financial control front have been able to borrow money at the same rates as fiscally well-entrenched nations. This has not motivated the lagging countries to reform, it is felt.
By initiating such credit, the ECB hopes to set right what it feels is its proper role by penalising those who are unable to curb their budget deficits.
Simon Hayley, senior international economist at Capital Economics said: “Any belief that the repo system offered significant protection from bond risk was always naive. [Mr] Trichet has now opened up the possibility that the ECB might exclude some countries' debt entirely and this might be the catalyst that undermines investors' previous complacency.”
Posted
on : Fri, 11 Nov 2005 06:45 GMT | Banking News
By : Chris Rowe
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