9 June, 2016
In its March meeting, the European Central Bank (ECB) announced a fresh package of stimulus and one measure of that package -- relating to corporate bond purchases (CBP) -- kicked off on Wednesday.
While announcing the guidelines, ECB released a statement saying that it will buy the bonds of European 'investment grade' corporates other than those of banks.
However, on the first day of purchases, ECB picked up some junk-rated securities, namely Telecom Italia that is Italy’s biggest phone company but with a junk rating from Moody’s and Standard & Poor's rating agencies.
Is the European Central Bank (ECB) deviating from its guideline?
Not exactly but it is definitely taking up bigger risk while it buys these securities. Telecom Italia is rated one notch below the investment grade at Ba1 and BB+ respectively by Moody’s and Standard & Poor's but the third rating agency Fitch (whose ratings the ECB takes into account) has given the lowest 'investment grade' rating to it.
A minimum requirement for ECB purchase program eligibility is the award of an investment grade rating by any of the three agencies.
Will the ECB sell the securities if Fitch also downgrades them to junk?
No. At last meeting, the ECB President Mario Draghi clarified that ECB will keep the securities in its portfolio even if they are downgraded after the purchase.
What does ECB’s first day of purchase tell us?
It is a clear message that the ECB is willing to take up additional risk by buying bonds that seem too risky an investment.
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