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A. Orphanides has long been warning about the @ecb using external private credit rating agencies to determine collateral eligibility of € gov debt. Will this finally be changed, or is the Italian banking system really at S&P's mercy at the end of April?
voxeu.org/article/how-ec…
voxeu.org/article/how-ec…
A potential downgrade of Italian sovereign debt would entail the ECB not accepting it as collateral any more in its normal monetary operations with banks. A large amount of IT gov debt is hold by IT banks, whose access to ECB liquidity would be curtailed, leaving only ELA.
Evaporating demand from banks would also put IT gov bond markets under stress. Thus, the problem under the current system is that market based assessments of debt-sustainability can be self-fulfilling, and might give rise to multiple equilibria.
