The European Central Bank (ECB) is checking whether it may have contravened its own strict rules by lending to Spanish banks on overly generous terms.
Banks had borrowed funds from the ECB and taken a haircut of 0.5 per cent even though the creditworthiness of the Spanish T-bills they provided as collateral should have required the ECB to apply a haircut of 5.5 per cent. The rating of some paper should have made them completely ineligible as collateral for the ECB.
At issue is nearly €80 billion worth of 18-month T-bills German newspaper Die Welt am Sonntag said had been wrongly classified as carrying a top-notch A rating, whereas many are rated only as B by leading rating agencies Moody's, Fitch and Standard & Poor's.
If the bonds were downgraded, the affected banks could have to produce other collateral amounting to as much as €16.6 billion in value.
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© Reuters
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