Hard-pressed Portugal received strong support from the European Central Bank on Thursday after the bank pledged to keep providing it with liquidity in spite of ratings agency Moody's downgrading its debt to ‘junk’ earlier this week.
The downgrading of recently bailed-out Portugal's credit rating to junk rattled financial markets and cast new doubt on European efforts to rescue distressed euro zone states without debt restructuring.
ECB president Jean-Claude 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 Euro-system 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 had 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.
Refusing to accept Greek bonds as collateral would deprive Greek banks of the funds on which they rely, crippling the Greek economy and risking contagion to other Euro zone economies. Most economists expect the ECB to baulk at that and keep banks afloat somehow.
In its release the ECB said it “has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Euro-system’s credit operations in the case of marketable debt instruments issued or guaranteed by the Portuguese government. This suspension will be maintained until further notice”.
The Portuguese government has approved an economic and financial adjustment program, which has been negotiated with the European Commission, in liaison with the ECB, and the International Monetary Fund.
The ECB “has assessed the program and considers it to be appropriate. This positive assessment and the strong commitment of the Portuguese government to fully implement the program are the basis, also from a risk management perspective, for the suspension announced herewith. The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Portuguese government”.