Eurozone row over monetary policy heats up

The Bundesbank yesterday condemned a decision by the European Central Bank (ECB) to loosen its collateral rules in a sign of rising tension over the conduct of European liquidity operations.

The ECB released a statement announcing that it would accept a broader range of assets in return for short-term liquidity lending to banks, in a move designed to ease the funding pressure on the continent's fragile financial sector. But the powerful German central bank immediately voiced its disapproval of the loosening.

Some German policymakers have argued that the ECB is taking too much credit risk on to its balance sheet.

The ECB will now accept assets rated as low as BBB, including residential mortgage-backed securities and paper backed by loans to small businesses. These will be subject to a 26 per cent haircut. The ECB will also accept commercial, mortgage-backed securities, which will be subject to a 32 per cent haircut.

The news of the collateral rules easing gave an immediate boost to the euro, which rose to $1.258.

"Anytime you can get the ECB more involved in this process the market views that as a positive development," said Bob Sinche of RBS Securities.

The collateral loosening is believed to have been pushed through to assist Spanish banks which have been finding it increasingly difficult to fund themselves.

An audit of Spanish banks on Thursday said they would need up to €62bn (£39.83bn) in new capital. Spain will make a formal request for assistance on Monday.