Merkel backs creation of European credit rating agency

The pivotal role played by the world's top three credit rating agencies, all of them US-based, has been highlighted in recent weeks, as incremental downgrades for Greece, Portugal, Spain and Ireland have helped fan a fire of market doubts, leading to higher borrowing costs for the weaker eurozone countries.

On the same day that her cabinet approved a €22.4 billion loan for Greece, Ms Merkel said there was a clear case to be made for a European ratings agency.

A European agency could provide "an understanding of basic economic mechanisms different from the existing agencies, more oriented towards ...[sustainability] of the economy and less on the short term," she said. "More competition in this area can not hurt."

The German government is now pressing for parliamentary approval for the Greek loan by the end of this week, after eurozone finance ministers on Sunday agreed to provide Athens with up to €110 billion over three years (2010-2012), together with the IMF.

The country's finance minister Wolfgang Schauble met with banking representatives on Monday in a bid to secure private sector support for the initiative. Officials told the Financial Times that Mr Schauble was seeking a commitment from banks and insurers not to sell their holdings of Greek bonds at the present juncture, in order to help stabilise markets.

French finance minister Christine Lagarde also added to the debate on credit rating agencies on Monday, saying there should be more supervision of the current agencies to ensure their full independence.

ECB liquidity provision

To date, the European Central Bank has only accepted 'investment' grade sovereign bonds from European banks looking to borrow money. But on Monday the Frankfurt-based institution performed an about-turn, saying it would in future accept 'junk' status Greek sovereign bonds as collateral.

The move, a clear indication that the ECB is also joining in with the eurozone's rescue efforts for Greece, highlights concern that further credit rating downgrades for Athens could result in a liquidity shortage for the country's banks, subsequently harming the economy.

The central bank was among those criticising the timing of last week's downgrade of Greek bonds to 'junk' status by credit rating agency Standard and Poor's, with fears that further such downgrades by the remaining agencies could shut Greek banks off from ECB lending prompting Monday's announcement.

But the decision marks a dramatic u-turn for ECB President Jean-Claude Trichet, who began the year saying the ECB would not change its "collateral policy for the sake of any particular country."

The bank's governing council meets this Thursday in Lisbon, where it will likely discuss the need to extend this provision to other countries.