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More S&P Downgrades: Rating agencies may target tacky collateral

The matter for France

Even as European ministers get busy to mull over fiscal union and other options to extend EFSF stretches for the ultimate solution due at the December 5-7 summit, France is under the radar with ratings agency S&P speculating action on France as per a La Tribune Monday report. Why we feel this may be likely is the fact that S&P’s plan after the big downgrade Wednesday seems clear from its methodology, looking at all credit and enhancements blatantly used and reused  in extended ECB support for banks and sovereigns in the region since 2010.

While one already knows of Asset backed securities worth at least $500 bln just created for due collateral pushing to ECB, concerns about the Dexia bill to be shared by France add to its primary concerns of an extended deficit and a recession to exacerbate the situation for the last standing friend of Germany that could have shared leadership and governance of the equal monetary and fiscal union with Germany As recession talks accelerate, public investment / domestic investment in more sovereign issues in France and elsewhere also becomes unlikely

A lot of current ratings actions at S&P have come before or after administrative mistakes, The downgrade for France also limited to this news report and a system error on its website earlier in November.

Banks pay for the downgrade

However the issue  at hand is the tacky collateral or the subordinated debt that central banks have bitten even as Central bank coordination on easier Dollar Liquidity Swaps makes the inter bank freeze a non issue. It is clear though that bank funding costs will go up as short term money market funds are also customers for bank debt and new ratings from S&P will mean increased yields for these funds on new flotation by the banks.

S&P Action closely follows Moodys’ action target

Moody’s plans to downgrade banks’ subordinated debt announced hours before the S&P downgrade. Moodys’ already thinks it unlikely Central Banks would be able to support defaults on these subordinated issues of 87 issuers as Central banks deal with limited liquidity and in Europe, the European system of central banks is forced to consider a fiscal union / Euro bonds

A lot of collateral issued to ECB no longer requires a rating as rating links to funding are a matter for idea strapped collateral windows in the 15 odd central banks that make up the Euro system



2 comments on “More S&P Downgrades: Rating agencies may target tacky collateral

  1. Pingback: What Germans made of the Euro in ten years | The Banking and Strategy Initiative

  2. Pingback: US & European Banks : Did you make the long list? | The Banking and Strategy Initiative

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