The European Central Bank is going easy on Portugal, making the euro bounce. Whether the lift will last is another matter.
The European Central Bank surprised approximately no one when it announced it a 25-basis-point interest rate hike earlier today. But Jean-Claude Trichet, the bank's president, did have one zinger up his sleeve.
Trichet said the bank would suspend its rating-requirement standard for Portugal so that nation could continue to use its bonds as collateral for central bank loans, just days after Moody's slashed Portugal's debt rating.
"We have decided to suspend the application of the minimum credit rating threshold," Trichet said today. "In the case of marketable debt instruments issued and guaranteed by the Portuguese government, this suspension will be maintained until further notice.
"And we took that decision taking into account the fact that the Portuguese government has approved an economic and financial adjustment program, which has been negotiated with the European Commission ... with us and the International Monetary Fund. The Governing Council has assessed the program and considers it appropriate."
The euro rose on the news, partly because it suggested some movement in the standoff between the ECB, the banks holding troubled European government bonds, and the rating agencies.
But does this mean happy days are here again? Not exactly, says Neil Mellor, a currency strategist with Bank of New York Mellon.
"This particular Gordian Knot is at no risk of being cut just yet," he says.
It's also worth noting that hedge funds have been taking positions anticipating that the sovereign debt crisis will spread.
Oh, and Trichet did make some other news: he indicated that the next interest rate hike would not be immediate, perhaps because "Trichet is clearly aware of the potentially detrimental impact of further hikes in interest rates upon growth in the ‘periphery’ nations," as Mellor puts it.
Euro buyers, be careful out there.
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