The ECB announced a change in its collateral rules to accept sub-investment grade collateral after an unscheduled call of its governing council on the 22nd of April 2020.
“The Governing Council of the European Central Bank (ECB) today adopted temporary measures to mitigate the effect on collateral availability of possible rating downgrades resulting from the economic fallout from the coronavirus (COVID-19) pandemic.”
The ECB has previously amended its rules to accept Greek sovereign bonds as collateral in Eurosystem credit operations on the 7th of April 2020. It also increased “its risk tolerance level in credit operations through a general reduction of collateral valuation haircuts by a fixed factor of 20%.”
The move is widely seen as the ECB taking a pre-emptive move before the rating agencies start to downgrade European sovereign debt. Investors are concerned that Standard & Poor’s will downgrade Italy on Friday. Italy is currently rated BBB and is on negative outlook leading to speculation that the rating will be downgraded. There is a further concern that this could trigger a wave of downgrades of Italian corporate debt.
In its latest move, the ECB said it had decided to temporarily exempt any bonds that are downgraded to junk status as long as they had an investment grade rating on the 7th April 2020, the new collateral rules will remain until September 2021.
The minimum credit rating for bonds as on the 7th of April 2020 was BBB- for all assets, except asset-backed securities (ABS) which had a minimum rating of A-. These bonds will remain eligible as long as their rating remains at or above BB or for ABS a rating of BB+
“The ECB may decide, if and when necessary, to take additional measures to further mitigate the impact of rating downgrades, particularly with a view to ensuring the smooth transmission of its monetary policy in all jurisdictions of the euro area.”