ECB says it raises discount penalty on Portuguese bonds

27th May 2011, Comments 0 comments

The European Central Bank has raised the discount charged on Portuguese bonds offered as collateral for central bank loans following a sovereign ratings downgrade, an ECB spokesman told AFP on Friday.

The "haircut" or amount deducted from the face value of Portuguese bonds was raised to 10.5 percent from 5.5 percent, which means that banks trying to borrow ECB funds must put up more collateral to obtain an equivalent amount in loans.

The ECB decision came after Toronto-based ratings agency DBRS downgraded its rating of Portuguese sovereign debt, the bank spokesman said.

"This adds to the negative market mood on the periphery, for sure," UniCredit fixed income strategist Elia Lattuga told AFP.

"But in terms of implications for bank borrowing, I don't see it as a major event that might create problems for Portuguese banks."

DBRS took the decision on Tuesday owing to a "significantly weaker than expected growth outlook and larger than expected fiscal imbalances" in Portugal, an agency statement said.

DBRS thus downgraded Portuguese debt in both local and foreign currency to BBB (high) from A (low), because it felt that "prospects for Portuguese debt stabilisation are more challenging" now.

The ECB also charges a discount on Greek bonds and governing board members warned recently that any restructuring of Greece's debt could result in such bonds being no longer eligible as collateral.

Observers have suggested that might be meant to raise pressure on European political leaders to find a long-term solution for the Greek debt crisis.

© 2011 AFP

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