Published on 26 April 2021

The discussions and calls following the launch of my Bruges Group paper “The ECB’s Pandemic Emergency Purchase Programme” surfaced two areas for further examination.

One was the “pot calling the kettle black” issue: why is the UK structurally and materially in a superior position (even if we have the wrong direction-of-travel and share some of the same Koolade)? There is another blog and a separate paper to address this question.

The other issue is this one: to justify our contention that the credit ratings of Eurozone public sector bond issuers are four notches too high.

This is important because of trickle-down and trickle-up:

• if the rating of the Kingdom of Spain is over-stated, then so are the ratings of the autonomous regions, the municipalities, the state railway, the public development agencies, the power, water and transport utilities, all of whom gain their rating as much from their dependency upon the Kingdom as from the strength of their own financials;
• if the ratings of member states are over-stated, then so are the ratings of all the supranationals for whom the member states act as a major line of credit support: the EU itself, EIB, EIF, the ESM and so on.

Please click on this link to download the paper.

The whole lot are over-graded by several notches, and this means that some bonds held in the PEPP are scarcely even Speculative Grade, and that pools of assets sitting behind such bonds contain individual ones that are Junk.