As seen in the previous chapter, ratings are a central feature of the collateral framework, both with respect to eligibility and haircuts. Furthermore, despite the problematic times experienced over the last few years in Europe, a surprisingly large fraction of Eurosystem eligible collateral have a rating of A− or higher. Understanding the rating rules and their implications is therefore important. This chapter starts by summarizing these rules and how they have evolved over time. This is followed by discussions of exemptions and of evidence that relates to the important role of rating agencies and government guarantees.

I want to emphasize seven points up front. First, since January 2007, rating agencies have come to play a well-defined legal role in the rating process within the Eurosystem's collateral framework.

Second, since that time, the basic rule is that only the highest rating from one of the official rating agencies matters. These were initially Fitch, Standard & Poor's (S&P), and Moody's. Dominion Bond Rating Services (DBRS) was added to the list in February 2009. Similar collateral can have different haircuts and therefore different collateral values, as a function of which rating agencies they are rated by. I present specific examples that illustrate such crosscollateral inconsistencies. Using one of these examples, I also present cursory evidence that higher ratings lead not only to lower haircuts and higher collateral values but also to higher market prices (lower yields), ceteris paribus. This is further evidence that the collateral framework has direct impact on secondary markets.

Third, I compare and contrast the ratings given by the four accepted agencies to all euro-area countries over time. The evidence shows that as a result of the inclusion of DBRS into the collateral framework (with its first set of sovereign ratings given in 2010), Italy and Spain have received A− ratings (on the S&P scale) they otherwise would not have had. This has reduced the haircuts, and thus increased the collateral value, of Italian and Spanish government securities within the Eurosystem's collateral framework. The extra collateral value from DBRS's pivotal ratings of these two countries is substantial. I estimate that in August 2013, it was worth around EUR 115 billion, growing to around EUR 165 and 180 billion by July 2014 and January 2015, respectively.