The European Central Bank (ECB) has signalled it will still accept Irish Government bonds as security even if they are relegated to junk status.
Two days after ratings agency Moody’s dubbed Portuguese sovereign debt junk status, the Frankfurt-based ECB said that it would suspend its normally stringent ratings requirements for the country’s bonds "until further notice".
This decision bodes well for the Government as its rating is hovering just one notch above junk status.
It also offers assurances to the country’s banks, which are currently borrowing around €120bn from the Frankfurt-based ECB to keep themselves afloat, according to the Central Bank’s latest figures.
A statement by the bank’s 23-member governing council - on which Irish central bank governor Patrick Honohan sits - said the reason for the bank’s decision was the “strong commitment of the Portuguese government to fully implement” a tough austerity plan in exchange for a €78bn EU/IMF loan, agreed in April.
Ireland has already met the requisite targets under the first review of last year's €85b rescue package, and the Commission, ECB and IMF officials are currently in Dublin assessing further progress.
The ECB has been accepting Greek bonds as backing even after they were downgraded to junk by all three major ratings agencies last year.
ECB president Jean-Claude Trichet said that private sector involvement in a second Greek rescue - a condition imposed by Germany and other eurozone paymasters - could trigger a default in that country, in which case the bank would no longer continue to accept its bonds.
“The default or selective default could be the consequences of some of the actions and then we would say, no, it is not what we would consider appropriate in the circumstances,” he told reporters after a regular monthly meeting of the bank’s governing council today.