ECB's Trichet seeks to dampen Greek default fears
LONDON—European Central Bank president Jean-Claude Trichet on Thursday sought to downplay mounting market fears that Greece could default on its debt, insisting a support framework outlined by EU leaders last month was "workable" and "a very, very serious commitment" by fellow eurozone governments in support of the struggling country.
Trichet made the remarks following the bank's decision to leave the main interest rate at a record low of 1 percent for the 11th month running. The decision was expected and attention focused almost entirely on the Greek crisis.
The backstop accord for Greece, which would include bilateral loans from willing eurozone countries and aid from the International Monetary Fund, does not seem to have worked -- the country's borrowing costs continued to shoot higher.
The spread between the Greek and German 2-year bonds spiked by a staggering 1.2 percentage points Thursday as investors demanded more interest just to hold Greek debt. The equivalent difference between 10-year bond yields also widened to 4.4 percentage points earlier, its highest level since the euro was introduced in 1999.
Investors are clearly fretting about the ability of the Greek government to get a grip on its public finances despite plans to cut the budget deficit by four percentage points to 8.7 percent of the Greek economy this year alone. But Trichet sought to dampen jitters in the markets that Greece is heading towards defaulting on its debt.
"I would say that, taking all the information I have, default is not an issue for Greece," Trichet said after persistent questioning on Greece's debt crisis and the EU's response to it.
Trichet's patience appeared to wear thin as he was questioned several times about the potential involvement of the IMF in any bailout of Greece. Just a couple of months back, he dismissed talk of the IMF riding to the rescue -- on Thursday he said he was specifically referring to the IMF assisting Greece on its own without the European Union.
He would not give his opinion on the punishment bond markets have been handing Greek debt by pushing up yields. "I never comment on real-time market reactions," he said.
"The market is always right, but I do not comment on it," Trichet said, adding that the markets would also be right when Greek spreads diminish.
Trichet insisted that the activation of the package is in the hands of the Greek goverment and that it was up to its partners in the eurozone to decide at what interest rate the money will be handed out. Eurozone governments have so far y kept this vague, only insisting that Greece would not get a subsidy.
One of the big questions in the markets at the moment is what actually would entail a subsidy. Trichet said that was nothing to do with him though he stressed that the principle of no subsidy was "absolutely clear."
"It is up to each government, but there is a minimum, which is that the interest rate.....would be at least the cost of the refinancing by the various governments concerned," said Trichet.
The clock is ticking -- the Greek governments needs to raise around euro12 billion over the coming six weeks and will clearly find it financially-crippling if it has to do so at current market rates.
"Having met its funding requirement for April, the Greek government may have few weeks to decide on its next step," said Jane Foley, research director at Forex.com.
The European Central Bank also confirmed that it would be keeping its crisis collateral measures on lending to banks for longer than originally planned.
That means the bank will continue to accept lower-rated government bonds as collateral from banks beyond 2010 -- originally it had planned to get rid of these collateral arrangements at the end of this year.
However, Trichet said there will be changes in the way the funds are distributed, with higher rated countries getting more favorable terms than the lower-rated ones, like Greece.
Ostensibly, the move is widely considered to be a concession to Greece, whose credit rating has been slashed and whose banks faced the ignominious prospect of not being able to tap the ECB for liquidity.
The lower rated countries will have to pay a premium -- or haircut -- for continued access to the liquidity, Trichet confirmed instead of the previous uniform rate of 5 percent applicable to all eurozone members.
Investors had worried that the ECB would no longer accept Greek debt if the ECB returned to rules that it would accept only highly rated bonds as collateral for short-term credit to banks, or if the country's rating was downgraded again.
On the broader economy, Trichet said the recovery continued in the early months of 2010 -- figures earlier this week showed eurozone output was flat in the last three months of 2009 -- but that the bounceback would be "uneven" and come at a "moderate pace."
Regarding inflation, Trichet said price stability was likely over the medium term despite a recent uptick largely due to weather factors, and that inflationary expectations were "firmly anchored."