However, sometimes a rating change comes along that could have some material impact. In this case, it comes from a lesser known agency – Dominion Bond Rating Service (DBRS). In an interview with Spanish daily Expansión this morning, their Head of Sovereign ratings Fergus McCormick warned that Spain’s rating remains under pressure and that it is too early to tell if the crisis has bottomed out (as many in the Spanish government have suggested might be the case). DBRS' latest report on Spain, from March this year, also struck a more cautious tone.
This is interesting because, as Reuters pointed out in July, DBRS is the last rating agency to give Spain (and Italy for that matter) an A rating.
As the article also explained, this could cause problems for Spanish banks for the following reasons:
- They hold a large amount of Spanish government bonds as collateral for their borrowing from the ECB;
- Under ECB rules, the ECB judges collateral based on the highest single rating from four eligible agencies (S&P, Moody’s, Fitch and DBRS);
- The value of these bonds is subject to a haircut – for example a highly rated 10yr+ government bond would be subject to a 5% haircut, meaning a bank could borrow up to 95% of the bond's value under the ECB’s liquidity operations (see here for the full ECB collateral haircuts);
- However, once the rating falls, the haircut to such a bond jumps to 13%. This means banks using such bonds as collateral would have to reduce the amount they borrow from the ECB or produce more collateral to cover their current level of lending.