Covered should be level one LCR assets

Peripheral sovereign bond investors are anxiously recalibrating their exposures and rapidly coming to the conclusion that they would have been better off buying covered bonds. With Greece’s debt spiralling out of control and growth prospects looking dimmer by the day, a restructuring of its debt is drawing closer. And where it goes, others may follow. Despite that, sovereign debt is considered an eligible level one asset under Basel III. This makes no sense relative to covered bonds which, being a level two asset, have many more restrictions despite their generally higher ratings and better recovery prospects.