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Government bonds in the ECB collateral framework: What role for credit ratings in the new normal?

How does the ECB's reliance on external credit assessments affect bond yields, government vulnerability, and potential sovereign debt crises?


Peter Praet

former Member of the Executive Board, European Central Bank


Check-in and breakfast








Event materials:




Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. The panelists at this event discussed how such features in a central bank’s collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This policy can potentially induce sovereign debt crises and defaults that would not otherwise occur. The success of the ECB’s temporary suspension of these features of its collateral framework during the pandemic illustrates the practical relevance of this mechanism.