The European Central Bank (ECB) threw its rulebook out the window yesterday in a bid to protect Portugal from spreading Eurozone contagion.
In a question-and-answer session with journalists, ECB president Jean-Claude Trichet abruptly announced that the Bank will suspend its normal criteria for acceptable collateral in order to keep the taps running for Portuguese banks.
The country’s banking system is dependent on Frankfurt for some €40bn in funding, according to recent estimates, but it has to provide “eligible” collateral for the loans.
Trichet’s announcement yesterday means that Portuguese government debt can count as collateral even if the main three ratings agencies rate the country as having defaulted – a suspension of the Bank’s normal rules.
It follows similar decisions on Greek and Irish debt made in May 2010 and March this year respectively and is based, the ECB says, on an assessment of the countries’ fiscal plans as being “appropriate” even if ratings agencies think otherwise.
The decision is the EU’s latest move against the ratings agencies, which European Commission president Jose Manuel Barroso accused of anti-European “bias” earlier this week after Moody’s downgraded Lisbon into junk territory and warned a second bailout was likely.
Global regulators are currently in the process of purging rating agencies’ legal status from a raft of financial rules, with the aim of making the economy less reliant upon their judgments.