Unexpected relief

Just a few hours ahead of the long-awaited EU summit, Greece received some unexpected relief. During his appearance at the European Parliament, ECB president Jean-Claude Trichet announced that the ECB will keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010. In parallel, the ECB plans to introduce, as of January 2011, a “graded haircut schedule”. As part of its non-standard measures during the financial crisis, the ECB had lowered the threshold for assets accepted as collaterals to triple-B-minus, from A-minus. While other non-standard measures are now gradually phased out, the crisis measure will stay.

Technical details of the plan will be presented at the press conference after the next ECB meeting on 8 April. At least two main questions will then have to be answered: will the new rules only apply to government bonds or to all other asset classes currently eligible as collateral? Will a threshold (minimum rating) still exist? At present it seems likely that different haircuts will be applied for every rating level going down to BBB-. The question is whether the graded haircut schedule would also apply for ratings below BBB-. Currently, the only haircuts the ECB applies to sovereign debt are tied to the maturity, not the credit rating.

A new “graded haircut schedule” could be seen as the ECB’s contribution to increase fiscal discipline in the future. As a consequence, yield spreads across the Eurozone could be wider than in the past.