Following the US Fed, the ECB also steps in to help 'Fallen Angels'... Agrees to accept junk-rated collateral

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Following the U.S. Federal Reserve (Fed), the European Central Bank (ECB) has also decided to assist so-called 'Fallen Angels,' companies whose credit ratings have been downgraded to speculative grade. By relaxing collateral requirements, the ECB aims to recognize bonds issued by some recently downgraded issuers as eligible collateral, thereby injecting liquidity and preventing a credit crunch.

On the 22nd (local time), the ECB held an unscheduled monetary policy meeting and announced in a statement that it would take temporary measures to partially ease the eligibility criteria for collateral from companies whose credit ratings have been downgraded due to the economic impact of the COVID-19 pandemic. Bonds that were rated 'BBB-' or higher as of the 7th but have since been downgraded to 'BB' or higher will be recognized as eligible collateral. This measure will be in effect until September next year.

The ECB had already relaxed collateral conditions for its liquidity support program once on the 7th. However, concerns about a credit crunch in financial markets due to COVID-19 have intensified, and calls to support Fallen Angels have continued. Additionally, there were worries that the credit ratings of several European countries, including Italy, could fall to junk bond levels, potentially hindering the proper functioning of the ECB's liquidity support program.

Notably, this measure came a day before credit rating agency S&P was scheduled to decide on Italy's sovereign credit rating on the 23rd. As a result, the market viewed this as a move to support Italian government bonds. Following the ECB's announcement, the yield on Italy's 10-year government bonds fell from 2.27% to 2.08%, signaling a slight easing of risk for Italian bonds.

However, ECB officials explained that this decision places more emphasis on corporate bonds rather than government bonds. They stated that if Italy's sovereign credit rating falls to speculative grade, a similar measure to the one taken for Greek government bonds on the 7th could be used. At that time, the ECB recognized Greek government bonds downgraded to speculative grade as eligible collateral.

The ECB emphasized, "If necessary, we will announce additional measures to mitigate the impact of credit rating downgrades," adding, "especially to ensure that monetary policy across all euro area countries proceeds smoothly."

This measure is similar to the Fed's speculative-grade corporate bond purchase program announced on the 9th. The Fed decided to purchase some speculative-grade corporate bonds, commercial mortgage-backed securities (CMBS), and collateralized loan obligations (CLOs) to inject liquidity. The junk bond purchases targeted corporate bonds downgraded from investment grade BBB- or higher to speculative grade BB- or higher, similar to the ECB's approach.

The reason major central banks are taking such measures is interpreted as a preemptive response to growing concerns about credit crunches in key industries such as aviation and automotive due to the prolonged COVID-19 crisis. According to an S&P report on the 11th, approximately $640 billion worth of corporate bonds in the U.S. and EMEA (Europe, Middle East, and Africa) regions were estimated to have been issued by companies likely to become Fallen Angels.

This content was produced with the assistance of AI translation services.