Covid-19: ECB ready to accept bonds that have become "rotten" as bank guarantees

The European Central Bank (ECB) announced on Wednesday April 22 that it could accept degraded bonds in the "rotten" category as collateral for loans to banks. This new measure is intended to support the European financial system in the midst of the coronavirus crisis.

Press release: ECB takes steps to mitigate impact of possible rating downgrades on collateral availability https://t.co/S1uiTvUxY3

The economic crisis threatens many companies, particularly in the most affected countries like Italy, to no longer be included in the "investment" category of rating agencies.

This means that banks would no longer be able to use their assets to finance themselves from the ECB, while aggravating for these companies an increase in their borrowing costs.

"Continue to provide finance to the euro area economy"

After an extraordinary meeting of its governing council, the ECB said on Wednesday that it would apply its credit score to each asset as of April 7, so that banks can continue to use it, provided that the score remains in the upper part of the non-investment category, ie two notches in the "speculative" category.

"These measures are intended to ensure that banks have sufficient assets capable of being mobilized as collateral within the Eurosystem to participate in the supply of liquidity and to continue to provide financing to the economy of the eurozone, "said the ECB.

This measure will probably be interpreted by some investors as a first step taken by the ECB towards the purchase of bonds rated in the speculative category as part of its exceptional program of 1.1 trillion euros, like what made the US Federal Reserve.

The Frankfurt Institute also leaves the door open to other initiatives. "The ECB could decide, if and when necessary, to take additional measures to further mitigate the impact of downgrades, particularly with the aim of ensuring the smooth transmission of its monetary policy in all jurisdictions in the euro area ", she says.

As part of its very cheap financing operations, the ECB is currently lending to banks at rates as low as -0.75%, granting discounts to establishments which then distribute these funds as loans to companies.

With AFP and Reuters

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