WITH NO sign of any easing in the tension in sovereign bond markets, the European Central Bank yesterday responded to Moody’s sharp downgrade of Portugal by waiving its credit rating threshold on its debt.

The turmoil in the euro zone prompted another spike in notional Irish borrowing costs as Spanish and Italian debt came under pressure in the wake of the surprise “junk” rating on Portugal. Irish 10-year bond yields jumped above 13.4 per cent and the yield on two-year paper came close to 16 per cent, levels at which a return to markets would be impossible.

Although Dublin fears the relentless volatility could derail its effort to re-enter private debt markets next year, ECB president Jean-Claude Trichet avoided saying yesterday what the Government should do about that.

He noted, however, the bailout plan was “going in the right direction” and said it was extremely important to apply the programme.

“I only mention the fact, for instance, for Ireland the current was positive last year, the last figure we have, and that is something which demonstrates that the adjustment is proceeding in line with what was foreseen,” he said.

Mr Trichet said all countries should stay ahead of the game in the debt crisis. He was speaking after the ECB’s second interest rate increase in three months.

Asked about the impact of the rate increase in Ireland, Mr Trichet said the measure was designed to foster stable prices. “Ireland, as all other countries, is benefiting from the fact that we are credible in delivering price stability and we have a solid anchoring of inflation expectations,” he said.

Analysts warned that a further increase is in prospect after Mr Trichet said inflation was likely to remain above the bank’s 2 per cent ceiling in the coming months.

The interest rate rise came as senior bankers met in Rome in a fresh attempt to break the deadlock of private creditor participation in a second Greek bailout, with little signs of progress.

Mr Trichet reiterated the bank’s opposition to any measures that would result in a default rating on Greek debt, saying any departure from a purely voluntary initiative would be counter-productive.

“If you depart from the global doctrine, you are weakening what you are aiming at, namely maintaining financial stability in Europe as a whole and in the euro area,” he told reporters.

The ECB’s move on Portuguese debt means its bonds will continue to qualify as collateral for emergency liquidity support for the country’s banks. Similar measures are in place for Ireland and Greece.

Mr Trichet added his voice to criticism of the credit rating agencies but said it would be “a little bit naive” to think there was an easy solution to the structure of the sector. “It is clear that there is an element of pro-cyclicality which is embedded in the functioning of the credit rating agencies . . . It’s also clear that a small group, a small oligopolistic structure is not what is probably desirable at the level of global finance.”