Tags: EU | Europe | Interest | Rates

ECB's Trichet Tries to Calm Fears of Greek Default, Sees 'Workable' Solution

Thursday, 08 Apr 2010 09:45 AM

European Central Bank president Jean-Claude Trichet on Thursday downplayed the risk that Greece could default on its debt, insisting a support framework outlined by EU leaders last month was "workable."

At a news conference following the bank's decision to leave the main interest rate at a record low of 1 percent for the 11th month running, Trichet said the support plan was a "very, very serious commitment" by the euro zone governments.

The backstop accord for Greece, which would include bilateral loans from willing euro zone 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 swelled by a staggering 1.2 percentage points Thursday as investors demanded more interest just to hold Greek debt. The spread between Greek and German 10-year bond yields 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 pretty savage plans to cut the budget deficit by four percentage points to 8.7 percent of the Greek economy this year alone.

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.

Trichet also confirmed that the European Central Bank will not be scrapping a batch of crisis collateral measures at the end of this year as originally planned — that means the Bank will continue to accept lower-rated government bonds as collateral from banks. That helps support demand for Greek bonds.

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 amid concerns it can't get a grip on its mountain of debt.

The lower rated countries will have to pay a premium — or haircut — for continued access to the liquidity, Trichet confirmed.

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 euro zone output was flat in the last three months of 2009 — but that the recovery 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."

Earlier, in London, the Bank of England extended a yearlong record low in interest rates and left its multibillion-pound asset purchasing program on hold in its last monthly decision before a national election.

The decision to keep rates at 0.5 percent for the 13th consecutive month and maintain the so-called quantitative easing program at 200 billion pounds ($304 billion) was widely anticipated amid concerns that Britain's recovery from a punishing recession remains fragile.

"The recovery is taking shape but remains heavily reliant on policy support," said Stephen Boyle, head of RBS Group Economics.

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