Trichet scrambling to save ECB credibility

LONDON (MarketWatch) - 5 May 2010 - Jean-Claude Trichet will be fighting for the credibility of the European Central Bank as well as the euro on Thursday as he faces questions over the institution's decision to throw away collateral rules for Greek debt, economists said.

In concert with the 110 billion euro ($142.7 billion) European Union-International Monetary Fund aid package detailed Sunday, the ECB president announced that the central bank would accept Greek bonds as collateral for loans to euro-zone banks even if they had been downgraded to junk status.

That move flew in the face of a declaration by Trichet earlier this year that the central bank wouldn't alter its collateral rules for the benefit of a single country.

The ECB has "certainly done a U-turn and [Trichet] may have to do further U-turns in terms of providing liquidity assistance to European banks or in terms of extending the latest ruling on collateral to other Club Med debt, it's as simple as that," said Neil MacKinnon, global macro strategist at VTB Capital.

The ECB decision raises thorny questions that will make Trichet's monthly news conference "more than difficult," wrote economists at BNP Paribas.

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