ECB provides easier funding for Portugal
Frankfurt, July 8, 2011
The European Central Bank (ECB) had tried to hold the line on the euro zone debt crisis, helping Portuguese banks with easier funding while opposing any measures that could leave Greece in default.
The ECB had strong words for the credit ratings agencies, who have turned the screw on struggling euro zone members, and urged the EU political leaders to do their part to resolve a crippling debt crisis which has snagged Greece, Ireland and Portugal.
The ECB, as expected, raised interest rates by 0.25 points to 1.50 per cent as expected, and president Jean-Claude Trichet signalled another increase could be in the offing later this year to tame inflation.
The ECB also suspended collateral criteria for debt issued or guaranteed by Lisbon, a move it has already taken for Greece and Ireland and which means Portuguese banks will not be cut off from central bank funds.
The euro rebounded against other major currencies on the announcement.
As for euro zone governments, Trichet stressed repeatedly that resolving the chronic debt crisis was their responsibility, not the ECB's.
'The ECB remains on a collision course with the European finance ministers' who want private creditors to participate in a second Greek bailout,' Commerzbank chief economist Joerg Kraemer said.
The ratings agency Standard & Poor's has warned that current proposals to have banks and other private creditors rollover Greek bonds would amount to a 'selective default,' in which case the ECB would not be able to accept Greek government bonds from commercial banks as collateral against loans to them.
That would effectively sink the Greek banks and send shock waves through other weak euro zone like Ireland and Portugal, who along with Athens have also been bailed out by the EU and International Monetary Fund.
Trichet insisted that ECB governors 'are not the decision makers and we do not want to substitute for decision makers.'
But he warned that plans now being mulled by finance ministers like debt rollovers or swapping current bonds for longer-term ones could result in the sort of 'credit events' that ratings agencies would term a default.
'Credit events, or selective default, or default, we say no, full stop,' the ECB president stressed.
'We detected no signs of the ECB becoming more flexible on the selective default issue,' Morgan Stanley economist Elga Bartsch said.
'The ECB's stance make it extremely difficult for the finance ministers to realise their plans for private sector involvement' in a second Greek rescue, Kraemer added.
Ernst & Young senior economic adviser Marie Diron felt, however, that 'Trichet's comments ... were designed to appear tough, putting pressure on governments in the periphery to take action but at the same time leaving the ECB with some room for manoeuvre.'
Meanwhile, the Bank of England kept its key interest rate at a record low yesterday, as expected, and is likely to stay put for the rest of the year as the economy struggles to gain momentum.
A stream of disappointing economic data had meant the no-change verdict was a foregone conclusion and there was no market reaction.