ECB puts up a fight

While European editorialists yesterday called for concrete action to be taken against the rating agencies suspected of destabilising the eurozone, Jean-Claude Trichet, president of the European Central Bank (ECB), has brought forward a rapid and “inflexible” response, notes Les Echos. At the conclusion of the monthly meeting of the Governing Council in Frankfurt less than forty-eight hours after the brutal downgrading of Portugal’s sovereign debt by Moody's, the president of the ECB has taken three decisions that are a “signal to European governments, rating agencies and markets in these incredibly turbulent times,” writes the French daily.

First decision:

By raising its key rate a quarter point for the second time since the start of the year, to 1.5 %, the Central Bank showed that its main priority lay with looking after the eurozone, where Germany continues to chalk up strong growth. It will not allow its monetary policy to be 'hijacked' by the financial crisis in the indebted and peripheral countries that may be in need of a respite, even if only in short-term rates.

The decision was hailed by the German press, particularly by the Frankfurter Allgemeine Zeitung:

The ECB must remain a rock in the storm and face the dangers of inflation(...). The Central Bank should not focus on the weaknesses of the peripheral countries.

But the decision was met with fear in the southern countries, as [reported by La Vanguardia](http:// http://www.lavanguardia.com/opinion/editorial/20110708/54182803289/el-bce-sube-el-precio-del-dinero.html):

Once again the orthodoxy has dictated its own rules to the institution, dismissing any flexibility that could allow it to help the weak recovery in Europe(...) It is clear that countries with higher debt will be punished by the higher rates and, of course, all those countries that are furthest from economic recovery – that is to say, the peripheral countries, including Spain.

Second decision: to support Portugal, attacked by the downgrading from Moody's. [For Le Figaro:](http://Le Figaro (fr): http://www.lefigaro.fr/conjoncture/2011/07/07/04016-20110707ARTFIG00578-la-bce-sauve-le-portugal-et-tacle-moody-s.php)

The announcement of the 'immediate' suspension of the rating criteria allows Portugal’s debt to be accepted in exchange for the country’s refinancing operations. This sovereign decision allows the European monetary institution to take on all Portuguese debt “as collateral,” whatever their ratings, thus helping the Portuguese banks avoid a liquidity crisis that would be fatal. The ECB is adding a monetary rescue to the fiscal rescue launched by the IMF and the European Union. It’s a direct tackle on the rating agencies, a critique that is more common coming from the mouths of politicians than from central bankers.

With this support “Jean-Claude Trichet has shown that he wholly disapproves of the brutal decision by the Moody’s agency. He also, incidentally, launched a charge against the ‘oligopolistic structure’ of the rating agencies, whose operation is “procyclical” – that is to say, they exacerbate the trends,” adds Les Echos for its part.

And finally, the last announcement: the recapitulation of a categorical refusal to admit a Greek default. “Jean-Claude Trichet made it clear that if the Greek debt is threatened with default, the ECB would no longer accept Greece’s securities as collateral.”

For the editorialist of Les Echos:

[Trichet] is twisting the neck of a scenario that began to take on a vigorous life, especially in Berlin, of a selective default, as it should be called, after Standard & Poor's introduced the idea. That is to say, a bankruptcy of Greece that is temporary and limited in scope(...) By setting this limit, Jean-Claude Trichet is acting as he should. It preserves the banking system of the Eurogroup from a new shock.

And the newspaper concludes:

In the short term, the orthodoxy of the President of the ECB suits no one. It even increases the pressure on the country in difficulties. Yesterday, Irish and Italian ten-year rates reached new heights. But in the longer term, hopefully, it's probably the price to pay to come out on top of the current whirlwind.