The European Central Bank will try to deter EU states from overspending by warning that it will refuse to accept their sovereign debt as collateral if their credit ratings slip too far, the Financial Times reported today.
The bank will accept only bonds with at least an A- rating from one or more of the main rating agencies as collateral in its financial market activities, the newspaper said today.
The current list of eligible collateral does not include assets rated below A-, according to the FT. But so far, the central bank has not refused to accept government bonds from any of the countries using the euro.
The ECB currently requires that debt accepted as collateral be of high credit quality. It has never specified a credit rating required for the debt.
The Frankfurt-based body is likely to explain the move as part of efforts to increase transparency, according to the FT report, which cited unnamed European Union financial policy makers.
"Nothing has changed in terms of rules, but the ECB appears to be stepping up warning against lack of fiscal discipline," said Wee-Khoon Chong, fixed income strategist at RBS Financial Markets.
"Essentially, the ECB is saying that just because you are a sovereign EU country doesn't mean the ECB will help you if don't fix your fiscal problem," he said.
If a country's bond were rejected by the ECB, it may be more difficult to sell. It also means the government may have to offer much higher returns to investors to compensate for potential default risks, in turn raising its own financing costs.
Under EU rules, governments must keep annual budget deficits below 3 per cent of Gross Domestic Product (GDP). However, roughly half the 12 euro zone countries are violating the budget rules, led by its two biggest members France and Germany.