Currently ECB rates various Italian Strips with an “A” rating, though no rating agency rates Italian bonds, let alone Strips, with an A.
ECB claims it is correct, because a tiny rating agency, DBRS, still rates Italian bonds with an A. However, DBRS said to Spiegel upon being questioned, that this particular rating was not to be applied to Strips.
Two hours later DBRS sent an email to Spiegel, claiming that they (Spiegel) must not use this information in public.
Via Google Translate from Der Spiegel, with thanks to reader Bernd, please consider The strange standards of the ECB
When it comes to the valuation of bonds, the ECB wants to be independent and transparent. But that manages to SPIEGEL ONLINE information, not always. In many Italian government securities, the central bank based on a credit rating that is not according to the rating agency for these bonds.Emergency Brake
According to information obtained by SPIEGEL ONLINE, the European Central Bank (ECB) has very unusual standards when it comes to the valuation of government bonds, on deposit as collateral for loans. Specifically, it's about 116 Italian government bonds without coupon interest rate, known as stripped bonds or short strips. They are currently valued by the ECB and the Italian national central bank with a grade of "A" - although rating agencies actually do not assign that grade.
By assigning an "A" rating, the ECB favors those banks that submit such papers as collateral when they borrow money from the central bank. This especially favors Italian financial institutions.
In the evaluation of collateral, the ECB relies on the scores of the four rating agencies. While large companies S & P, Moody's and Fitch Italy have credit already on a "B" status downgraded, only the smaller agency DBRS, caries the "A" rating of 116 Italian Strips bonds.
The problem: The agency itself has told SPIEGEL ONLINE stated that their ratings are not applicable for Strips.
Stripped bonds are securities of a special kind: The offshoot of fixed rate bonds are sold to pay the revenue generated interest due to other securities. They also have a so-called zero coupon: The yield on these strips with some long term will only be paid when due, until then sees the investors in such securities no money. The profit of the investor resulting from the difference between the purchase price and the redemption at maturity of the bond. It is an investment that requires a lot of trust in the buyer's future solvency of the seller. In this case, the confidence of future Italian governments apply. And this must be long: 56 of these strips have remaining maturities of more than ten years, 30 of which are not paid 20 for years, the last three not until 2041.
Fitch rates 107 of the strips as 'B'. The classification used by the ECB should not be used. It's that simple.
Suddenly, DBRS Is Silent
Just three hours after the ECB's reply to the request by SPIEGEL ONLINE, another e-mail came from DBRS: Statements to SPIEGEL ONLINE should not be made public and DBRS would longer comment on this matter.
That's what you call an emergency brake.
More than a little pressure on DBRS by ECB president Mario Draghi, coupled with a distinct willingness of the ECB to look the other way? Ya Think? What other sleight-of-hand magic is the ECB making?
I used the word "Fictional" in the title of this post. "Fraudulent" seems more like it.
Mike "Mish" Shedlock