Friday, August 17, 2012

Eurozone sovereign bond ratings

Here is an update of a previous table with the addition of EZ ratings from Canadian firm DBRS (Dominion Bond Rating Service).  DBRS do not provide a rating for all EZ countries but their ratings can be important as shown below.

Bond Ratings(2)

This Bloomberg article from July 2011 explains how the ECB uses the ratings from these four companies.

The ECB determines the size of the premium, or so-called haircut, it applies to government bonds on the basis of the best credit rating from four companies -- Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and DBRS. DBRS currently rates Ireland at A, two steps higher than the grades of S&P and Fitch and four steps above that of Moody’s.

DBRS’s rating means the ECB applies a 3 percent haircut on fixed-coupon Irish bonds with a residual maturity of five to seven years and a 4 percent premium on paper that will expire in seven to 10 years. Bonds rated BBB+ to BBB-, like those of Portugal, incur premiums of as much as 9 percent, as does debt from Greece, which is accepted as collateral independently of its rating.

Last week’s confirmation by DBRS of the A(low) rating for Ireland meant we ‘dodged a bullet’ in the words of this Wall Street Journal post

Canadian rating firm DBRS Inc. just showed the little guy still matters.  The fourth-biggest rating company downgraded Spanish and Italian government debt late Wednesday, and affirmed its stance on Irish bonds.

With the “big three” controlling around 95% of the global ratings market, DBRS doesn’t command the same attention. But when it comes to the euro-zone’s financially troubled countries, it should.

Because the European Central Bank listens to DBRS just as it does to the others.  DBRS is one of the four ratings firms the ECB uses when deciding how much it charges investors for using sovereign bonds as collateral in exchange for loans.

Luckily for those keen to avoid shakeouts in euro-zone bond markets, DBRS still rates those governments in the “A” category, with an “A (low)” for Spain and Ireland only one notch into the area. Italy is three notches above at an “A (high).”

Cutting them below an A-rating level would have spurred the ECB to charge 5% more for using Spanish and Irish government bonds as collateral.

DBRS have Italy at “A” rather than “A(high) as stated in the article.  Also the ECB’s collateral framework is set to be overhauled in September which may change the significance of these ratings.

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