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Geert Geel
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17143 Posts
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 Posted?-?22 Dec 2010?:? 22:37:50 ? 
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ECB Set to Become World’s Largest Junk Bond Fund
By Geoffrey T. Smith
Reuters
ECB President Jean-Claude TrichetBarring miracles, 2011 is going to be the year when the European Central Bank becomes the world’s largest junk bond fund.
The announcement Monday by Fitch Ratings Agency that it has put Greece under review for a downgrade means that it is almost certainly only weeks before the Hellenic Republic loses its last investment grade rating.
The event will be largely symbolic in the first instance: the safety net that the EU and International Monetary Fund have put under Greece this year mean that it doesn’t need to worry immediately about the loss of access to serious investors.
But even a symbolic event will be an ominous start to a year in which the European debt crisis threatens to come to a head: with hundreds of billions of euros in sovereign and bank debt to refinance next year, Moody’s Investor Service has all four of the euro zone’s problem children–Portugal, Ireland, Greece and Spain–under review for downgrades, while Standard and Poor’s assigns negative outlooks to all of them.
Fitch has negative rating outlooks on 48 European banks and positive outlooks on only two.
As imperfect a guide as ratings are to actual events, the trend is clear: more and more European debt is becoming more and more likely to default.
In public, the ECB has refused to admit that possibility this year, President Jean-Claude Trichet pouring scorn on the very idea. However, its actions tell a different story. Last week, it announced plans to increase its capital, strengthening its balance sheet against possible losses.
The risks it is carrying are growing every week. The ECB has more than €330 billion outstanding in loans to banks in the four problem countries. It now owns outright over €72.5 billion of euro-zone government debt, chiefly from Greece, Ireland and Portugal, the three countries considered most likely to default. Greek Finance Minister George Papaconstantinou says the ECB has “tens of billions? of euros in Greek debt on its balance sheet, making it one of the country’s largest creditors already, if not the largest.
The ECB doesn’t give any national breakdown of the bonds it has bought under its Securities Markets Program.
“When they first started buying Greek debt in May, they said that they knew more about the situation in Greece than the markets and the ratings agencies did,? said Jacques Cailloux, chief European economist with Royal Bank of Scotland in London. “I haven’t heard them saying this for a while.?
In this respect, the two last meetings of EU heads of government have been game-changers, committing the EU to devising a way to make sovereign debt restructurings possible, albeit only after the middle of 2013.
Klaus Baader, an economist with Societe Generale in London, also thinks the ECB is having second thoughts about the quality of the bonds it’s holding, uncomfortable in the knowledge that, unlike the IMF, it has no seniority over other bondholders if a government should default on its debts.
“The ECB’s decision to raise its capital may not have been directly linked to it, but it’s hard to believe that they’re not thinking about (the risk of a debt restructuring),? Baader said.
On the positive side, says Cailloux, the ECB has made most of its purchases through the Securities Markets Program at distressed prices anyway, and so it wouldn’t necessarily suffer a loss if it had to restructure them. But that doesn’t necessarily apply to the government bonds included in the €322 billion of “other securities? that the Eurosystem–that is, the ECB and its 16 national central banks–holds on its balance sheet.
Nor do the Eurosystem’s risk end there. The Irish central bank has €44.67 billion in “other assets?, the bulk of which is emergency lending assistance to Irish banks that not only appear to be insolvent, but which also appear to have run out of collateral that they can post with the ECB.
“Would the central bank of Ireland provide that if the ECB could?? Cailloux asks.
The ECB last week expressed “serious concerns? that the new Irish law on bank restructuring didn’t give it enough protection as a creditor in the event of a bank failure.
Carsten Brzeski, an economist with ING in Brussels, thinks that the ECB won’t have long to wait to see if its concerns are well-founded, saying that 2011 “will see the endgame of the sovereign debt crisis: the buying of time and the postponing of decisions will have to come an end.?
https://blogs.wsj.com/source/2010/12/22/ecb-set-to-become-worlds-largest-junk-bond-fund/
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Het zal toch niet waar zijn.... |
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