ECB undecided on ‘fallen angel’ purchases
Frankfurt, Germany, May 26 (efe-epa).- The vice-president of the European Central Bank on Tuesday said the entity had yet to decide whether or not to buy so-called fallen angels, corporate bonds that have seen a drop in their investment grade rating.
Luis de Guindos said in his financial stability review that the ECB had already relaxed its approach to accept such bonds as collateral, but that talks were ongoing as to whether it would start purchasing them as part of the debt buying program.
The ECB took temporary measures in April to mitigate the impact of possible credit rating downgrades as a result of the coronavirus pandemic.
It said it would accept bonds that had been downgraded so long as they met minimum investment requirements with a credit rating of BBB as of 7 April 2020 and were currently no lower than BB, which is non-investment grade, or more simply known as a junk bond.
The measure is known as the Pandemic Emergency Purchase Programme and has an envelope of 750 billion euros ($822bn) of bond purchasing until the end of the year.
De Guindos said 45 percent of marketable corporate debt had a BBB credit rating.
In the minutes from the ECB’s late April meeting, the bank noted an increase of fallen angel bonds and “concerns over the outlook for corporate profitability implied that financial conditions for firms and banks remained tighter than before the outbreak.”
The bank said corporate default rates could also increase “measurably” over the next year.
Speaking via videoconference Tuesday, De Guindos said: “The pandemic has caused one of the sharpest economic contractions in recent history.”
“But wide-ranging policy measures have averted a financial meltdown.”
“However, the repercussions of the pandemic on bank profitability prospects and medium-term public finances will need to be addressed so that our financial system can continue to support the economic recovery,” he added.
Governments across the European Union have drafted economic stimulus packages but such moves raise questions about the sustainability of the debt they are taking on.
De Guindos warned that the “increase in public debt comes on top of already higher debt levels in some sovereigns.”