Ponzi Comes Full Circle: ECB Will Rate Sovereign Bonds It Accepts As Collateral

Tyler Durden's picture

Two days ago we noted with muted disgust that Europe has legislated to scrap the use of rating agencies, who were everyone's best friend during the up-phase in the global ponzi, but now that deleveraging is accelerating and ratings downgrades are coming, are like the drunk guest who refuses to leave the insolvent party at 4 am. Sure enough, the time has come to enact rules to kick them out. But wait, there is much more. Moments ago Reuters reported that the European Central Bank is discussing a medium-term plan (as in indefinite) to scrap rating rules on euro zone sovereign bonds and instead set their value when used as collateral in lending operations on its own internal assessment, central bank sources said. You read that right: the ECB itself will decide what the collateral value is of pieces of paper it accepts, in exchange for other pieces of paper with the faces of famous dead people on one side (even if technically the whole operation takes place electronically). And to think that for some odd reason allowing drug addicts to write their own prescriptions is illegal. Apparently all is fair in love and breaking all rules of sinking monetary systems.

More from Reuters:

With the ECB not yet ready to take over the technical but highly political responsibility for rating sovereigns, the bank's policymakers will also discuss more immediate ways to help Spain and its banks at their meeting on Thursday, such as further widening the types of collateral Spanish banks can use.

 

The discussion come as Spain braces for a downgrade from small rating firm DBRS, which without a change in ECB rules will trigger an extra 5 percent penalty on Spanish bonds when used to get ultra-cheap ECB funding.

 

ECB members have heavily criticised the actions of rating agencies during the euro zone crisis and have vowed to reduce reliance on their assessments.

 

"In the case that the ECB Governing Council decides this, it would reduce the widely criticised influence of Standard & Poor's, Moody's and Fitch," one euro zone central bank source who spoke on the condition of anonymity said.

And the punchline:

"On the other hand, this could also expand the shrinking pool of collateral which banks in troubled countries have available."

Bingo. Only not "expand" it, but make it worth whatever Goldman ex-banker Mario Draghi decides it is worth. In other words, the last remaining market test of even the faintest credibility, the one backstopping roughly ten trillion in deposits, has just become worthless

There is still some hope:

Opposition, in particular from the Bundesbank, has been strong, however. The German central bank has argued that the dramatic loosening of the rules has increased the risk of lending to banks for the ECB and the national central banks.

It is still unclear what criteria the ECB would apply in the future if it ditches the use of rating agencies in the area of sovereign bonds.

One central bank source said there would continue to be a sliding scale of haircuts (charges) that would be applied to the different countries' bonds.

"It is clear that the ECB will continue to make reductions depending on the creditworthiness of the country whose bonds are submitted to it as security," said the insider.

Sadly, at his point not even Germany can turn the ponzi choomwagon around.

It will make for some great comedy though, when in retaliation for continuing German obstinacy to hike German retirement age to 100 so that the French can retire at 60, the ECB itself will downgrade Germany's credit rating.

You laugh, but it's coming.

Obviously, once the general public comprehends that the ECB has now gone full tilt with its entire deposit base, backstopping it by now officially worthless paper in the biggest and most corrupt failure of circular valuations ever, and everyone decides to invest in the First and Only Mattress Bank, it will be too late. And the ECB will be saying how nobody, nobody, could have possibly predicted that it itself is the precipitating factor for the terminal bank run.