The European Central Bank is investigating claims that it used a high credit rating from a Canadian ratings agency to grant loans to Spanish banks at a sweetheart rate that was not offered to another struggling euro zone country.
An ECB spokesman in Frankfurt, Philippe Rispal, said the bank is “currently investigating this matter” and that the probe would determine whether “the correct haircut has been applied” to the Spanish sovereign bonds that were used as collateral for ECB loans.
The term “haircut” refers to varying discounts applied to the collateral based on its credit quality. On the weekend, the German newspaper Die Welt am Sonntag said that about €80-billion ($102.3-billion U.S.) of Spanish treasury bills posted as collateral received only a 0.5 per cent haircut when a 5.5 per cent haircut would have been more appropriate, given Spain’s rising sovereign risks.
The newspaper said the ECB relied on the relatively high Spanish rating produced by Toronto’s DBRS in determining its collateral requirements. DBRS has assigned an A-low rating, with “negative trend” on all of Spain’s public sovereign debt. The other three ratings agencies – Fitch, Standard & Poor’s and Moody’s – have a lower single-B rating on the 18-month T-bills that were posted as collateral by the Spanish banks (DBRS rates the country, not the individual securities).
DBRS’s rating for Ireland is the same as its rating for Spain. Yet Die Welt said the Irish bonds used as ECB collateral were subject to a 5.5 per cent haircut, meaning the ECB apparently considered them much riskier than the Spanish collateral in spite of the identical country rating.
In an interview, Fergus McCormick, DBRS’s head of sovereign ratings, said he could not comment directly on the ECB investigation into collateral requirements, adding that he has had no contact with the ECB on this matter.
“It is our job to provide risk ratings,” he said. “It is our view that the ratings for Spain and the ratings for Ireland are the same. How it’s interpreted [by the ECB] is not our job.”
Die Welt said that, had the ECB demanded stricter criteria, the Spanish banks would have had to post more than €16-billion more collateral for their ECB loans.
An economist in Madrid, who did not want to identified, said the ECB had been using DBRS’s high rating for months to determine Spain’s collateral requirements. “It is old news,” he said.
Mr. Rispal, of the ECB, said a statement on the investigation’s results would be made by Thursday, when the ECB holds it regular rate-setting meeting and provides an update on its efforts to keep the euro zone intact.
While ECB president Mario Draghi has said the euro “is irreversible,” meaning that no country would voluntarily leave or get pushed out of the common currency, in his view, Greece’s financial stability is still deteriorating rapidly in spite of two bailouts and a private debt restructuring.
On Monday, as the ECB was investigating its collateral rules, Greece was set to kick off a week of strikes and protests ahead of two crucial parliamentary votes that would determine whether it would receive fresh financial support from the so-called troika – the ECB, European Commission and International Monetary Fund. The support would come in exchange for a €13.5-billion package of tax hikes and spending cuts, plus reform measures such as making it easier for employers to hire and fire workers.
About €31.5-billion in troika aid has been on hold for months because the fragile coalition government of Antonis Samaras has, so far, been unable to meet the troika’s bailout demands.
Greece’s public and private unions are enraged that the parliament is set to approve the new austerity measures in Wednesday’s vote. On Tuesday, the unions are to start a 48-hour strike that could paralyze the country. Doctors, journalists and shopkeepers are set to join the protest. Several strikes and protests in the last two years have erupted in violence. One proved fatal, when a firebomb tossed into a bank killed three bank employees. In protests in Athens last February, 40 buildings were heavily damaged or destroyed during pitched street battles between protesters and police.
In a note, Deutsche Bank said it expects the new austerity package to pass, though probably by a narrow margin. It said Greece was the victim of “rising political polarization in an economy which is expected to enter its sixth year of recession next year leading to a cumulative GDP decline of more than 25 per cent.”
If the Samaras government wins the vote on Wednesday, a second vote to approve the new budget will be held Sunday, at midnight. If the first vote is lost, Greece’s exodus from the euro zone would go from possible to probable.