As reported over the weekend [6], the German press did some work and discovered that despite Spain being rated practically junk across the board, its bonds pledged as collateral with the ECB had virtually no haircuts, despite as we said back in April, them needing to be haircut by a solid 5% or more [7] an amount which would force the Spanish banko-sovereign system to scramble to procure the critical €17 billion margin call. Well, moments ago the Bank of Spain (not the ECB) came out and said that the ECB had applied collateral rules correctly. However, by that they meant not that the ECB had demanded the needed 5% haircut due upon a downgrade into sub A-range, but that the rating agency which absolutely nobody has every heard of, Canadian DBRS [8], has a "rating that needs to be taken into account."
In other words, Spain's collateral call is now dependent not so much on Moody's downgrading the country to junk, which likely will happen soon if Rajoy does not demand the bailout which has been priced in for about 3 months now, but on what a tiny Canadian ratings firm, which has most certainly not gotten any quid pro quo from Europe to keep Spain at is A-low level (for long-term debt, not so much short-term) says is the Spanish rating quality.
Of course, should DBRS ever change its mind (wink wink), then the margin call will spring. As a reminder, Egan-Jones rates Spain CC...
And now go ahead and buy the EURUSD. However, before you do, here is what we warned yesterday [6]:
So it would appear that if a hedge fund really wanted to see Draghi sweat and bring Europe's teetering-on-the-brink edifice to its knees, it merely needs to pick up the phone and request DBRS to create report on Spain's short-term financial health - since surely they like the other three raters will see the dismal and accelerating worse state of economic dysphoria and be unable to maintain an 'A' rating on this nation?
In the end of the day, it will simply be a case of overbidding: can a consortium of hedge funds, currently packing a massive SPGB cash short, present an offer to DBRS that not even the Ontario-based rater can refuse (Mario Draghi right of first refusal notwithstanding).