Several months ago we listed a host of reasons why Europe’s crisis (NYSE:FXE) was getting worse. (Here’s the full article: 9 Reasons Europe’s Crisis is Worsening)
Among the reasons we mentioned was the velocity of credit downgrades for both European banks and governments.
How vicious has the downgrade cycle become?
So vicious, that the European Central Bank (ECB) is now mulling a new and improved plan (by “new and improved” we mean just the opposite) to become an ad hoc credit rating agency. You read that right! Instead of relying on outside credit rating agencies, the ECB will set the value of sovereign bonds as collateral it accepts in lending operations based upon the ECB’s own internal assessment, according to a Reuters report.
During the credit boom, rating agencies were everyone’s best friend. However, now that ratings can no longer be bought and paid for with gift cards from the Capital Grille, they’re universally despised.
Agencies like Moody’s (NYSE:MCO) and Standard & Poor’s (NYSE:MHP) have been strongly criticized by the ECB’s members. Doesn’t that sound familiar? The same thing happened less than a year ago when the U.S. Treasury objected to the negative outlook given to U.S. debt by Standard & Poor’s.
Spanish banks (NYSE:EWP) will be immediate beneficiaries of these coming changes by easing the collateral requirements for debt they need to put up.
No doubt, the ECB’s credit rating regime will make the previous establishment look saintly. It will also usher in an entirely new era of financial perversion.
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