September 30, 2014 4:00 pm
Mario Draghi pushes for ECB to accept Greek and Cypriot ‘junk’ loan bundles
Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank.
Mr Draghi, ECB president, will this week unveil details of a plan to buy hundreds of billions of euros’ worth of private-sector assets – the central bank’s latest attempt to save the eurozone from economic stagnation.
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IN EUROPE
The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.
Mr Draghi’s proposal is designed to make the programme of buying ABS, which are bundles of packaged loans, as inclusive as possible. If it is backed by the majority of members of the ECB’s governing council, the central bank would be able to buy instruments from banks of all 18 eurozone member states.
However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone’s largest economy.
Bundesbank president Jens Weidmann, who also sits on the ECB’s policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks.
Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB’s role as monetary policy maker and bank supervisor.
While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe’s securitisation market, it would free up billions in liquidity for banks in two of the eurozone’s weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area’s periphery.
Relaxing the rules would also signal the central bank’s intent to rid the region of the threat posed by weak growth and low inflation, which at 0.3 per cent is now at a five-year low.
A senior Greek banker says easing the requirements “would have a significant positive impact for the Greek banking system and the Greek economy”. The ECB’s efforts to ease monetary conditions in the periphery were being hampered by the rules on low credit ratings, the banker argues.
As the assets created in Greece and Cyprus are potentially riskier than those from banks elsewhere in the eurozone, the ECB would compensate by purchasing smaller proportions of these securitisations, according to a Eurosystem official.
In depth
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Further reading
Further reading
At present, the ECB only accepts ABS as collateral in exchange for its cheap loans if they hold a minimum rating of at least triple B, the lowest investment-grade rating.
The ratings on senior tranches are capped by the sovereign rating of the country where the bank is based. If those rules were to apply to the ECB’s buying plan, the central bank could not accept any securitisations of Greek or Cypriot issuers. Standard & Poor’s rates Greece and Cyprus as single B sovereigns – a sub-investment-grade rating. Fitch rates Greece as single B, and Cyprus as single B-minus. Moody’s rates Greece Caa1 and Cyprus as Caa3.
An ECB official declined to comment on Tuesday, saying proposals made to the governing council were confidential.
Meanwhile, the euro – which has fallen some 9 per cent against the dollar since the start of May – dipped below $1.26 on Tuesday for the first time since September 2012.
Additional reporting by Delphine Strauss
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