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have historically been the safest kinds of bonds - because they are backed by both the signature of the issuer AND by valuable assets.

Given that issuers are still fully on the hook, the temptation, as in non-recourse ABSs, to game the system by slowly worsening the quality of the assrts provided as security, is inexistent.

It's a practical way for serious issuers to recycle their long term assets and get some liquidity - but as the debt stays on their balance-sheet, they can't do that beyond certain limits.

As a matter of fact, covered bonds were invented at a time when sovereign or bank defaults were rather frequent, and they were specifically designed to ensure that they could not happen with them.

So there are good reasons to treat covered bonds as high quality collateral.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Mar 6th, 2011 at 05:18:09 AM EST
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