July 7th, 2011
09:47 PM GMT
Share this on:

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.

soundoff (4 Responses)
  1. Greg

    European politicians have no guts! I hope somebody will stand up and say what is right and ought to be said. Let the bondholders, i.e. German and French banks take the hit and teach them a lesson (or whoever sold them CDS aka default insurance). If Greece cannot make it with the Euro, let them go free on their own currency. A devaluation of the drachma would be less painful for the Greeks than the austerity measures. Instead of meddling in finance, politicians should just focus on good governance, e.g. do not allow anything become 'to big to fail' in the first way. Now, banks have become their liabilities. Instead of saving the banks, save the savers (guarantee savers' bank deposits). Don't reward the banks for failed investments. That would be the right thing to do. I hope some politician will get up, speak the truth and lead us out of this mess, be it in the EU or the US.

    July 8, 2011 at 2:47 pm |
  2. Steve Thompson

    One nation that seems to be flying under the mainstream media's debt radar screen is Italy. As holder of the world's third largest nominal debt, it has a debt-to-GDP ratio of nearly 120 percent, second only to Greece in the Eurozone.

    Here is an examination of the formidable fiscal battle facing Italy:


    July 9, 2011 at 3:15 pm |
  3. seppe

    i wonder ,were all this shortage of money went,because according to the rating of all this agency,there is not a country on this planet that have a sound financial accounting( including china),the question is ,how come all this agency know more of other country finances more than there own administrators,the irony of the all thing is that all this agency are based in USA and UK,and they have as much or worst problem as the rest of the world,or this is just another way of creating fake accounting?or maybe a distraction,or propaganda,or perhaps a justification to keep the nose into every one else affairs for profitt ,the big question is,WERE ARE ALL THIS TRILLIONS,THE MONEY THAT THE IMF PRODUCE FOR BAILOUT WERE COME FROM?OR THIS IS SIMPLE FAKE ACCOUNTING,if the last is the case then ,how come no body is prosecuted,since this fake economy is being going on for at list seventy years to my estimate.

    July 11, 2011 at 1:59 pm |
  4. icon pack

    I will know, many thanks for the help in this question.

    November 4, 2012 at 4:49 pm |

Post a comment


CNN welcomes a lively and courteous discussion as long as you follow the Rules of Conduct set forth in our Terms of Service. Comments are not pre-screened before they post. You agree that anything you post may be used, along with your name and profile picture, in accordance with our Privacy Policy and the license you have granted pursuant to our Terms of Service.

About Business 360

CNN International's business anchors and correspondents get to grips with the issues affecting world business, and they want your questions and feedback.

Powered by WordPress.com VIP