The concern around Italy beginning a..........>

ITALY: The concern around Italy beginning a descent into junk status is less

about ECB purchase criteria (which have been mitigated by Wednesday's

announcement that 'grandfathers' ratings from where they stood on April 7) - and

more about eligibility criteria for investors who cannot purchase junk debt.

- Barclays' understanding based on the ECB's announcement on non-investment

grade rules: in the case of a downgrade of the issuer's best rating to below

investment grade, public sector assets will continue to be eligble for ECB

purchases and collateral for liquidity operations, at least until September

2021. (Also note a higher haircut for non-IG collateral).

- That being said, Morgan Stanley note that S&P downgrading Italy to BBB- this

Friday (not their core scenario, they envisage a "wait and see approach" at this

stage) would "trigger further market concerns about Italy's benchmark inclusion

eligibility". This could help usher in EUR weakness, if the market gets

concerned about an increased probability of bond outflows.

- And of course, higher BTP spreads/yields in the event of market aversion

toward Italian debt would have a negative impact on banks in Italy and beyond.