Trichet Makes Up Own Rules, Suspends Portugal Rating Threshold

If anyone doubted the size of Jean-Claude Trichet’s ego, they are unlikely to do so anymore.

At his monthly news conference from Frankfurt, Germany, the European Central Bank (ECB) President had the gall to change a key rule regarding collateral that the ECB can take on. Trichet announced this morning that the ECB will suspend the application of the minimum credit rating threshold for debt instruments by the Portuguese government.

The decision follows this week’s downgrade by Moody’s of Portugal credit rating to junk status, which several euro zone officials strongly criticized.

Trichet’s decision is not the first time he has tried to change the rules during the middle of the European debt crisis. Last year he convinced the ECB to purchase Greek government debt in the hopes of suppressing interest rates.  With Greek yields surging to several new record highs this year, Trichet’s plan clearly backfired.  Moreover, the ECB is now left with a substantial amount of toxic Greek garbage on its balance sheet.

While the markets cheered Trichet’s decision, with all the major European equity indices moving higher on Thursday, the longer-term impact is unlikely to be as positive.

With today’s decision, Trichet is opening up a pandora’s box and further endangering the financial solvency of the ECB. It is particularly disappointing that this official continues to put taxpayers at risk in order to protect the interests of European banks that made bad financial decisions but unfortunately do not have to suffer the consequences of their actions.