The Kraken is a mythical deep-sea monster immortalised in the original 1981 version of Clash of the Titans.
As Wikipedia notes the monster is said to dwell off the coasts of Norway and Iceland. However, when he is unleashed on cursed nation states it is customary for him to demand pure virgin sacrifices in order to avoid the states’ complete destruction.
What strictly classifies as a virgin sacrifice, though, is presumably up for debate.
Which brings us nicely to Thursday’s announcement from a liquidity monster of a different sort.
We are, of course talking, about the ECB and the type of sacrifices collateral the Bank plans to accept from distressed member states (and others) from next January onwards.
As the Bank’s press release noted – and as flagged before — the key changes will effect the haircuts charged on lower-rated assets. The minimum acceptable rating threshold of BBB- for government securities will, however, remain in place, as will current haircuts for higher grade collateral.
The Governing Council of the European Central Bank (ECB) has decided to keep the minimum credit threshold for marketable and non‑marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs).
In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent).
[1] This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets. The detailed haircut schedule will be based on the following parameters:
* The new haircuts will be duly graduated according to differences across maturities, liquidity categories and the credit quality of the assets concerned. The lowest haircuts will apply to the most liquid assets with the shortest maturities, while the highest haircuts will apply to the least liquid assets with the longest maturities.
* The new haircuts will be at least as high as the haircut currently applied, which is a flat 5% add-on for the assets concerned over the haircut that would apply to similar assets with a higher credit quality.
* No changes will be made to the current haircut schedule foreseen for central government debt instruments and possible debt instruments issued by central banks that are rated in the above-mentioned range.
* The new haircuts will not imply an undue decrease in the collateral available to counterparties. The specific schedule of haircuts will be published in July 2010.
Which obviously isn’t quite the level of reform many in the market were hoping for.
Nevertheless, one further point is worth highlighting:
Furthermore, the Governing Council confirmed that the following instruments will no longer be eligible as collateral as from 1 January 2011:
* marketable debt instruments denominated in currencies other than the euro, i.e. the US dollar, the pound sterling and the Japanese yen, and issued in the euro area;
* debt instruments issued by credit institutions, which are traded on the accepted non-regulated markets; and
* subordinated debt instruments when they are protected by an acceptable guarantee.
Which seemingly means no more phantom repackaged securities or non euro-denominated debt accepted in ECB open-market operations from January onwards. Although, we should add, it’s not entirely clear whether the denomination remark refers to government debt too.
Rabobank’s first thoughts on the new arrangements were:
Small changes to ECB collateral framework
Trichet confirmed that the minimum credit threshold for eligible collateral would remain at investment grade level (BBB- or higher) “beyond the end of 2010”, except for ABS.
For central government debt instruments and possible debt instruments issued by central banks that are rated in the BBB+ to BBB- range there will be no changes in the haircut schedule – we interpret that as being mildly favourable for Greek government paper, for which conditions will remain unchanged beyond 2010 (provided there will be no rating downgrades).
For the BBB+ to BBB- range of a number of other assets the ECB will announce a specific “graduated” schedule of haircuts in July. The new haircuts will be at least as high as the haircut currently applied, which is a flat 5% add-on for the assets concerned over the haircut that would apply to similar assets with a higher credit quality.
Some assets will no longer be eligible as collateral as from 2011. This includes (1) marketable debt instruments denominated in currencies other than the euro and issued in the euro area (we assume this doesn’t refer to central government debt – but this is our interpretation), (2) debt instruments issued by credit institutions which are traded on the non-regulated markets, and (3) subordinated debt instruments when they are protected by an acceptable guarantee.
Overall these seem to be fairly small changes, but on balance would make the collateral rules a bit stricter from 2011 onwards – at least for some types of assets
So this would appear to be a mild positive for Greece since (barring a ratings downgrade) its sovereign debt will not attract higher haircuts.
For now.
Related links:
Trichet: ‘Default is not an issue for Greece’ - FT Alphaville
‘This might just be one of the most important communications by the ECB in its short existence’ – FT Alphaville
My Big Fat Greek Collateral Conversion – FT Alphaville
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