ECB Trick
Portugal is only acceptable in the bond markets once again on account of 'ECB/2014/10'
Portugal is returning to the capital markets for the first time in years. However, the demand for their bonds is high only because the ECB has helped them in a questionable way.
---------------------------------------------------------------
The room with the opulent chandelier conveys a certain seriousness. However, this does not apply to the mood that European leaders (in Washington) want to to convey.
They have been invited to a confidential meeting on the edge of the WorldBank Conference, in this historic, luxury hotel, and are pleased that the Euro- crisis is barely a topic of conversation anymore, here at one of the summit meetings of the financial world. Even a question about Portugal hardly disturbs them.
'The country has made great progress', says the politician who was one of the principal architects of the euro bailout in recent years.
In the summer, help from the euro bailout fund ESM and the International Monetary Fund runs out, and everyone is looking for a "clean exit" from the programme. Portugal should be able to stand on its own two feet, financially speaking, by then, without any need for further help or a precautionary credit line from the ESM.
The country is already returning officially to the free capital markets on Wednesday, and will offer ten year government bonds in an auction to investors, according to the national debt agency in Lisbon.
The first public auction, since the call for help to the EU in April 2011, should raise 750 million Euros for the state treasury.
A small change to the rules, with great significance
It would be a success story for the architects of the euro bailout, which they could really do with just before the European elections.
To this end, a number of European finance ministers have been praising Portugal in recent weeks.
What they don't say is this: upon its departure from the bailout programme, Portugal can rely on another, more subtle form of support. It is hidden in a twelve page document with the unwieldy name ECB/2014/10.
With this directive, the ECB is making a small change to its own regulatory framework, but one of great significance for Portugal. This is because, according to Die Welt's investigations, it relates directly to the future acceptance of Portuguese government bonds as loan collateral by the ECB.
For, as long as the ECB continues to accept Portuguese government bonds as loan collateral, this will hugely facilitate the sale of debt securities on the capital markets - without this relief, it would hardly be possible for Portugal to fully finance itself again from private monetary sources.
In this way, a crisis country benefits once more from ECB policy.
The background to this is the system of bank-financing in the euro-zone.
Credit institutions may, in principle, borrow unlimited amounts of money from the ECB, but they have to pledge securities as collateral against these loans. Bonds which are suitable for this purpose are therefore much more valuable to the banks, and are much easier to sell and can be placed at a much lower interest rate.
The Calls of the Portuguese were heard by the ECB
Credit worthiness is the decisive criterion: the ECB only accepts securities with a definite minimum credit rating, and it is precisely this point that the most recent change to ECB rules affects.
Under the old rules, Portuguese government bonds had not met this minimum credit rating for quite some time.
Portuguese government bonds could only be submitted as collateral with the ECB, because the credit quality threshold was overridden for countries with an ESM bailout. In this way, for example, the ECB continues to accept Greek government bonds as collateral.
But if Portugal were to leave the ESM programme as planned during the year, the special rule currently governing Portuguese government bonds would come to an end. Then Portuguese government bonds would no longer be eligible as collateral with the ECB. In this situation, banks would almost completely disappear as a buyers of these bonds (because they would have no use for them) and it would be highly doubtful whether Portugal could access enough money on the capital markets to fund itself.
For quite some time, the Portuguese government has been pestering the ECB to support the country during the exit from the rescue program.
However, all the calls for the ECB to buy Portuguese bonds directly from the government went unheard in Frankfurt (huge sigh of relief).
However, at least with regard to the rules on minimum credit ratings, the 24-member ECB Governing Council made a decision which played right into the hands of the Portuguese.
That decision had already been made into a formal policy by the middle of March. It applies from April 1st 2014, but for weeks it remained below the radar of public awareness.
Small rating agency, big impact
The crucial 'green light' for Portugal is hidden in bureaucratic wording. It says that the ECB will now also accept securities for financial transactions which are given a 'BBB (low)' rating by the small Canadian rating agency DBRS. Up to now, the threshold rating level was one notch higher, with a DBRS rating of "BBB".
This is important for Portugal because the country is currently rated "BBB (low)" (by DBRS). As far as the other three rating agencies, Standard & Poors, Moodys and Fitch are concerned, Portugal dropped out of the 'BBB' zone a long time ago.
-----------------------------------------------------------------------------------------------
The article goes on to say that, as we know, the ECB has dropped its credit rating criteria several times in the course of the financial crisis. Also, the Portuguese government will not be the only beneficiary of this ratings change.
Four Portuguese banks and an Italian bank will also benefit from the new minimum rating rule. Those banks are Banco Espírito Santo, Banco Comercial Português, Caixa Económica the Montepio Geral, the Caixa Geral de Depósitos and the Italian Banca Popolare di Vicenza.
