November 20, 2014 / 8:23 PM / 3 years ago

Moody's proposes lifting euro country risk ceiling

LONDON, Nov 20 (Reuters) - Moody’s Investors Service is proposing raising the country risk ceiling for a number of lower-rated euro zone states, citing diminished risk of an exit from the currency bloc.

If implemented, the changes could result in higher credit ratings on covered bonds and asset-backed securities (ABS) issued by peripheral euro zone states such as Italy, Spain and junk-rated Greece.

This would be good news for the European Central Bank’s purchase of these assets as it seeks to pump in a trillion euros into the bloc’s fragile economy. It would prefer to hold higher-rated assets.

Moody’s country risk ceilings determine the maximum credit rating achievable for a debt issuer domiciled in a particular country. It assigns specific ceilings to members of monetary unions, including the euro zone, to reflect the risk of exit and currency redenomination.

Moody’s proposed a maximum gap in the euro zone between a government bond rating and the country risk ceiling of six notches. “If implemented in their proposed form, the changes will result in higher country risk ceilings for some non-Aaa euro area countries,” it said in a statement.

“This would allow for the possibility of higher ratings on covered bonds and structured finance transactions in these countries as Moody’s country-risk ceilings determine the maximum credit rating achievable for a security whose cash flows are generated from domestic assets or residents.”

Currently, government bonds issued by peripheral euro zone countries such as Italy, Spain and Greece are rated two to three notches below the country risk ceiling.

The ECB has been buying covered bonds from euro zone countries and will next week expand it to ABS.

Reporting by Emelia Sithole-Matarise; Editing by Mark Heinrich

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