Thu Mar 25th, 2010 at 06:21:20 AM EST
FT.com / UK - ECB must re-examine its dependence on rating agencies
...until the end of this year, eurozone sovereign debt is eligible for the ECB's repo facility so long as it is rated at least BBB- by both S&P and Fitch, and at least Baa3 by Moody's. From the beginning of 2011, the threshold moves three notches up for all three agencies. Today, Greece is rated BBB+ by both S&P and Fitch, and A2 by Moody's. This means that if Greece is not upgraded by either S&P or Fitch before the end of this year, then Moody's - and Moody's alone - will decide whether Greek sovereign debt is eligible as collateral at the ECB. All it takes is a two-notch downgrade to bring them in line with the two other agencies and Greek sovereign debt would no longer be eligible as collateral at the ECB come 2011.
This is broadly equivalent to placing a nuclear device in the hands of Moody's because there can be little doubt that were Greece to lose eligibility at the ECB, this would imply an immediate collapse of the Greek financial system, almost certainly a sovereign default, and severe stress throughout eurozone financial markets. This is so scary - and the fact that the decision sits with Moody's makes it so unbelievable - that few people in the market think it is realistic. But how the ECB would react to a downgrade by Moody's nobody knows.
This op-ed in the Financial Times is by Erik Nielsen, Chief European Economist at... Goldman Sachs.
It's probably of secondary interest to wonder if GS would like to see the powers of the ratings agencies reduced (though one could wonder why, the current system has worked just fine for GS). More interesting, vitally so for us, is to wonder how much longer Europe is going to let Wall Street flog its craven hide?
Update [2010-3-26 2:28:37 by afew]: Jean-Claude Trichet, head of the ECB, announced yesterday that he would continue after 2010 to apply flexibility in his application of the collateral rules. In other words, that the ECB would go on taking Greek or other national bonds at lower ratings. (See, in French, Jean Quatremer's Brussels blog).