ECB Suspends Collateral Rules for Portuguese Debt, Hikes Rates .25; Trichet Says "No" to Selective Default, Market Yawns

The comedy show continues in the EU today with an announcement by ECB president Jean-Claude Trichet that he will suspend collateral rules on debt for Portugal.

Please consider ECB signals more rate rises to come, helps Portugal

The European Central Bank raised interest rates for the second time this year Thursday and signaled further policy tightening to come to tackle inflation despite the euro zone's intensifying debt crisis.

The ECB's key rate is expected to rise just once more this year, to 1.75 percent, with only two quarter-point increases forecast to follow for all of next year.

In contrast, the Bank of England kept rates on hold on Thursday.

The ECB has pledged to keep liquidity flowing to euro zone banks that need it, and Trichet said Portuguese debt would be accepted by the ECB as collateral for now, come what may.

"We have decided to suspend the application of the minimum credit rating threshold ... for the purpose of Eurosystem credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government," he said.

"This suspension will be maintained until further notice."

The ECB has proved a major stumbling block in agreeing a second rescue plan for Greece as it has threatened to refuse restructured Greek bonds as collateral in its lending operations in the event of a default or a "restricted default," which ratings agencies are threatening to impose.

"We say no to selective default," Trichet said.

Market Yawns

Trichet can shout "no default" from the mountain tops but it is not his call to make.

The market reacted to Trichet's defiance with a big yawn. Portugal 10-year government bonds opened at 12.62% and promptly sold off to 12.93%, not quite a new high.

Italian 10-year government bonds did make a new high at 5.19% and now sit at 5.14% up on the day.

Irish 10-year government bonds also made a new high at 13.02%, topping 13% for the first time. The yield now sits at 12.95%, up a substantial 51 basis points on the day.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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