Fitch highlights status of creditors

Sat, Aug 25, 2012, 01:00

THE EUROPEAN Central Bank buying government bonds in conjunction with Europe’s bailout fund would be positive for sovereign credit ratings as long as it does not substitute for private investors, Fitch Ratings has said.

Purchases by the ECB and the bailout fund “would likely be credit-positive and ease downward pressure on sovereign ratings in the euro zone”, Fitch said in a report to investors.

However, if the official sector were to replace private investors rather than support market access “the reliance on policy-conditional external financial support would not be consistent with a high investment-grade sovereign rating”, Fitch said.

ECB president Mario Draghi said on August 2nd that the central bank may buy government bonds in tandem with the bailout fund to stem rising borrowing costs, and that concerns of private investors about its senior creditor status “will be addressed”.

Fitch said the ECB would have to “credibly address the seniority issue” as it may hamper the effectiveness of any bond market intervention, with private investors fearing subordination in the case of a default.

The concern is that even if the ECB does “credibly pre-commit” not to exercise its preferred creditor status in a default, its bond purchases are likely to be associated with those of the bailout fund, which also enjoys preferential status, Fitch said, thus implying “some subordination of private creditors”. – (Bloomberg)