24th Sep 2023

Europe's central bank gives helping hand to Portugal

  • ECB chief Trichet defends the 'credibility' of his institution despite recent policy turns (Photo: The Council of the European Union)

In a move similar to the Greek case, the European Central Bank (ECB) on Thursday (7 July) suspended a minimum rating requirement for Portuguese bonds after one of the major credit rating agencies earlier this week downgraded Portugal to 'junk status'.

In response to the downgrade announced by Moody's on Tuesday, the European Central Bank has decided to suspend "until further notice" the minimum rating threshold required for Portuguese bonds, ECB chief Jean-Claude Trichet said during his monthly press conference in Frankfurt.

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This means the ECB will continue to buy Portuguese bonds regardless of the rating given to them by private agencies - a move also made for Greece.

Trichet insisted this extraordinary measure was not being taken because the ECB feared other rating agencies may follow suit and downgrade Portugal, but because the Portuguese "adjustment programme" agreed with the EU and the IMF at the end of June is "ahead of the curve". He noted the programme already deals with privatisations and increased taxes.

These steps are still required in Greece, for which the ECB already last year suspended its minimum rating requirement for buying up Greek bonds.

The outgoing ECB chief, whose mandate runs out in October, fiercely defended the "credibility" of his institution, which has been forced into numerous policy flip-flops - including the ratings exemption for Greece and now Portugal.

"We are very credible," Trichet insisted when pressed by journalists on the issue.

Yet with private banks and eurozone governments discussing a second bailout for Greece with private investor participation - a condition boxed through by Berlin - Trichet's calls to "avoid a credit event" and his "definite no" to what is called a "selective default" of Greece look increasingly defensive.

Along with the Portugal measure, Trichet also announced an increase in the ECB interest rate to 1.5 percent, the second hike this year. Asked by an Irish journalist if he feels any sympathy with Irish people, whose country is also subject to harsh EU-IMF austerity measures and who will be hit by the rate increase, Trichet responded: "Ireland needs to stick to its programme. I won't comment further."

He insisted that austerity measures work "for all the people in the eurozone", including Ireland where the current account is now "positive". But he also signalled that the ECB may further increase its interest rate in the coming months.

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