Fitch: ECB bond-buying could ease credit ratings pressure
by Daniel Mason
Sovereign bond-buying by the European Central Bank or the eurozone's bail-out funds could have a positive impact on credit ratings – as long as the issue of the ECB's preferred credit status is resolved and it does not lead to countries becoming over-reliant on the official sector for funding, Fitch has said.
At a press conference on August 2, ECB president Mario Draghi said the bank, or the rescue funds – the European Financial Stability Facility and the European Stability Mechanism – could buy bonds if a eurozone country made an official request for aid, though there would be strict policy conditions.
And assessing the impact of such an intervention in a report published today, Fitch said: "Sovereign bond purchases by the ECB in the secondary market, and primary or secondary market purchases by the EFSF or ESM, would likely be credit positive and ease downward pressure on sovereign ratings in the eurozone. The willingness and ability to conduct bond purchases in primary and secondary markets can allow the sovereign to retain affordable access to market funding, reduce the risk of self-fulfilling liquidity crises and by lowering sovereign credit spreads, ease domestic financial and credit condition."
But the rating agency added that depending too much on the ECB and bail-out funds would "not be consistent with a high-investment- grade sovereign rating" of A or above. "Prolonged reliance on official external support – whether directly lent or via bond purchases – with little prospect of a resumption of market access in the foreseeable future would place further downward pressure on sovereign ratings," according to the report.
In addition, the effectiveness of ECB bond-buying in bringing down a country's borrowing costs would depend on it "credibly" committing to not exercising its preferred creditor status in the event of a default, Fitch warned. Even if it did so, the association of its bonds with those purchased by the EFSF or ESM would imply "some subordination of private creditors". However, at his August press conference Draghi said the concerns about bond seniority would soon be addressed. The issue came to the fore when the ECB avoided the haircut imposed on private bondholders when Greece's debt was restructured.
Yesterday Reuters, quoting sources which it said had knowledge of the matter, reported that Spain was negotiating with eurozone partners over the potential conditions of financial aid before making a decision on whether to request assistance. But today a spokesman for the European Commission said no talks were underway on a programme other than the aid of up to €100bn for Spanish banks that has already been agreed.
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