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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.