ECB digs in on rates, Greece, provides cover for Portugal

The ECB hiked interest rates by 0.25 points to 1.50 per cent as expected and president Jean-Claude Trichet signalled another increase could be in the offing later this year if prices continue to rise.

The ECB had strong words too for the credit ratings agencies, who have turned the screw on struggling eurozone members, and urged European Union political leaders to do their part to resolve a crippling debt crisis which has snagged Greece, Ireland and Portugal.

Trichet attacked the "oligopolistic structure" of international credit rating agencies as undesirable in terms of global finance, echoing a widely held view in the EU that they need reform and tighter supervision.

In a key move, the ECB suspended its collateral criteria for debt issued or guaranteed by Lisbon, a move it has already taken for Greece and Ireland and which means Portuguese banks will not be cut off from central bank funds.

Portugal came under intense pressure this week after Moody's slashed its debt rating to junk status, pushing up the price Lisbon has to pay to raise fresh funds and thereby making it even more difficult to stabilise its strained public finances.

As for eurozone governments, Trichet stressed repeatedly that resolving the chronic debt crisis was their responsibility, not the ECB's -- a point he has made repeatedly in the past year as the Greek problme has gone from bad to worse.

"The ECB remains on a collision course with the European finance ministers" who want private creditors to participate in a second Greek bailout, Commerzbank chief economist Joerg Kraemer said.

The ratings agency Standard & Poor's has warned that current proposals to have banks and other private creditors rollover Greek bonds would amount to a "selective default," in which case the ECB would not be able to accept Greek government bonds from commercial banks as collateral against loans to them.

That would effectively sink the Greek banks and send shock waves through other weak eurozone like Ireland and Portugal, who along with Athens have also been bailed out by the EU and International Monetary Fund.

Trichet insisted that ECB governors "are not the decision makers and we do not want to substitute for decision makers."

But he warned that plans now being mulled by finance ministers like debt rollovers or swapping current bonds for longer-term ones could result in the sort of "credit events" that ratings agencies would term a default.

"Credit events, or selective default, or default, we say no, full stop," the ECB president stressed.

"We detected no signs of the ECB becoming more flexible on the selective default issue," Morgan Stanley economist Elga Bartsch commented.

"The ECB's stance make it extremely difficult for the finance ministers to realise their plans for private sector involvement" in a second Greek rescue, Kraemer added.

Ernst & Young senior economic advisor Marie Diron felt however that "Trichet?s comments ... were designed to appear tough, putting pressure on governments in the periphery to take action but at the same time leaving the ECB with some room for manoeuvre."

"We do not believe that the ECB would really sink the Greek banking system if, in a new support programme agreed with Europe and the IMF, ratings agencies were to classify a private sector debt rollover as a selective default," said Holger Schmieding, chief European economist at Berenberg Bank.

The EU and IMF are in talks with Greece on a second rescue package to take over from that agreed in May last year worth 110 billion euros ($158 billion).

Looking ahead, economists interpreted the ECB statement which said it "will continue to monitor very closely all developments with respect to upside risks to price stability," as a sign of at least one more rate hike in 2011.

They differed on whether it might come in October or December but all agreed with Kraemer, who concluded: "The next rate hike is in the pipeline."