July 7th, 2011
09:47 PM GMT
London (CNN) - The European Central Bank president Jean-Claude Trichet continued his contortions around the eurozone crisis this week, while he juggled the demands of a two-speed economic bloc.
In this week’s closely watched press conference Trichet announced the bank will accept Portuguese sovereign bonds as collateral in return for loans, despite ratings agency Moody’s dumping them into junk category this week.
Trichet created this precedent when the ECB continued to accept Greek bonds in May last year, after they had been junked by ratings agency Standard & Poor’s.
Trichet’s move on Greek sovereign bonds was an economically expedient twist on the rules, which had previously dictated bonds had to have ratings of BBB -. That rating had, in turn, been dropped from the pre crisis requirements for an A- minus rating.
The severity of the financial crisis made it impossible to stick with that line.
And so the ECB continues to navigate a difficult path through rules which appear unsustainable in an economic crisis of such magnitude.
And, as German Chancellor Angela Merkel indicated in comments earlier this week, Europe’s leaders will be leading the way, rather than being forced into action by the activities of the ratings agencies.
In his press conference Thursday Trichet made clear the current line in the sand: Sovereign bonds which have been rated as being in default would not be acceptable.
The comments come amid rising speculation Greece will be forced to restructure its bonds in a move which will be defined as a default.
But lines have been drawn before, and shifted.
Elisabeth Afseth, of Evolution Securities, said the move to accept Portugal’s bonds was not a surprise, given the precedent that had been set.
If Greece’s bonds did default, new precedents could be set, despite Trichet’s comments, she noted. “The ECB would turn around and say – it’s a special situation,” Afseth said.
Trichet’s announcement on Portugal followed the ECB’s decision to hike interest rate from 1.25% to 1.5%. It follows a raise in April, its first since 2008.
The decision will place pressure on the bloc’s struggling periphery countries such as Greece, Ireland and Portugal and throws into sharper contrast the two speeds of the eurozone.
The strong—Germany and France—are holding up the weak. But the ECB’s remit to control inflation for the entire bloc forces it to make decisions in which there will inevitably be losers.
And so the economic dance continues. For Trichet, the music is soon to stop. His terms expires on October 31, and Italian Bank Governor Mario Draghi will take the helm. The contortions are unlikely to stop.
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