THE European Central Bank (ECB) last night said it will accept Portuguese government debt as collateral for its loans to banks, even if it is downgraded to junk status. The decision breaks the ECB's own rules on credit quality.

It comes after Moody's ratings agency cut its Portuguese rating on Tuesday. The same decision was taken when the Greek government's debt rating was cut earlier this year. It means there will not be sudden and destabilising pressure on European banks to repay ECB loans secured on the bonds if other agencies follow Moody's decision.

ECB rules do not permit the use of "junk" bonds as loan collateral but the ECB picks the highest rating available when applying its criteria.

Mr Trichet re-iterated his opposition to any deal on a new Greek bailout that involves defaulting on Greek sovereign debt.

"All governments should stick to 'international doctrine' and pay their creditors," he said.

However, his willingness to waive the rules on Portugal will encourage German policymakers to push for a harsh settlement between Greece and its private sector lenders as their condition for new international support.

Ratings were among the topics discussed by representatives from banks and insurance companies in Rome, who held a third day of talks on their attitude to bondholder involvement in tackling the Greek debt pile.

The private sector has been told it must play some role in the second Greek bailout that is currently being finalised by Greece, the IMF and European institutions.

Talks among the banks ended without a decision last night and will kick off again next week.

Proposal

The main option being discussed by banks is a version of a French proposal that would see banks agree to re-lend 70pc of Greek debt back to the country as it is repaid at higher interest rates and with some extra security. The ECB favours that plan, even though it leaves Greece indebted.

However, after this week's Portuguese downgrade even the "French plan" looks likely to prompt a default rating, so Germany appears to be taking the view that if default is going to be called anyway it might as well get full value by hitting the banks harder.

Irish Independent