ECB’s ABS: not much junk to buy

Mario Draghi gave the feeling that he wasn’t be able to engage with some aspects of the current ABS and bond purchases program for two reasons, according to analysts from Santander: the lack of unanimity at the heart of the Council of the ECB and technical limitations.

 “In Spain and Italy there are hardly any ABS with a rating higher than BBB,” as JP Morgan’s Hugo Anaya commented on Friday.

Indeed, the rating agencies do not grant debt issuers with a higher rating than that, which for Spain is close to junk bond’s.

Another operational challenge of the ECB’s program is that it would increase its balance sheet in a very limited way. As Mr Anaya puts it:

“Considering that mortgage certificates and withheld ABS are used to deduct them on the ECB as collateral for liquidity, even if the ECB buys them its balance sheet will only increase by the difference between the purchase price and that collateral’s haircut.”

For example, if one takes a €100-ABS to the ECB in exchange for €85, if the ECB buys it, it would be increasing its balance by €15.