ECB raises borrowing costs despite eurozone's sovereign debt crisis

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The Independent Online

Despite growing concerns about further sovereign debt crises derailing growth in the eurozone, the European Central Bank yesterday raised interest rates for the second time this year.

The official rate now stands at 1.5 per cent, a rise of 0.25 percentage points.

Analysts said the tone of the press conference following the announcement pointed to further tightening later in the year, though perhaps not before the ECB's president, Jean-Claude Trichet, completes his term of office in October. They expect the so-called "quarter per quarter" normalisation of interest rates to continue, despite the risks to growth.

Mr Trichet was most keen, however, to reiterate his adamant opposition to any restructuring of Greece's sovereign debt – even the "voluntary" version proposed by a consortium of heavily exposed French banks. This – dubbed a "selective default" at the end of last week by the credit ratings agency Standard and Poor's – is unacceptable to the ECB, with Mr Trichet saying bluntly that their attitude is "no to selective default".

"We are not in favour of restructuring and so forth. We call for avoiding any credit event and selective default, say. And of course, default."

Following the downgrade of Portuguese sovereign debt to "junk" status this week, the ECB also announced that it would lower its collateral standards for Portuguese paper, enabling the nation's banks to borrow against their stocks of official debt. This, following similar moves over Greek debt, in effect allows the ECB to provide short-term financing to the Portuguese government, regarded by critics as a back-door bailout.

Janet Henry, an economist at HSBC, said: "The ECB will raise rates at a slower rate from here and expect the next rate rise in November."

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