Germany dug in on demands that investors pay some of the cost of a second Greek rescue after Jean-Claude Trichet rejected direct involvement by the European Central Bank.

“Participation of private creditors in cases of insolvency is indispensable,” German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today, ignoring warnings from credit- rating firms that his proposal to extend Greek debt maturities by seven years would be deemed a default. A working group set up this week is charged with “finding a good solution for the involvement of the private sector that can and has to be supported by the European Central Bank,” he said.

As politicians try to find a plan by June 24 that would share the cost of a new rescue with bondholders, Trichet yesterday ruled out the Frankfurt-based ECB setting an example with its own assets. While the bank has said it could accept a plan in which investors voluntarily agree to buy Greek bonds to replace maturing debt, President Trichet said the ECB has no intention of rolling over its own Greek holdings.

Sustained ECB resistance could leave politicians facing the prospect of asking their taxpayers to finance a Greek budget shortfall that may amount to 90 billion euros ($130 billion) through 2014. Trichet also warned against Schaeuble’s approach, saying any solution forcing private-sector involvement amounts to a “credit event” and would be an “enormous mistake.”

‘Pick up The Pieces’

“Trichet is really digging his heels in now,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London who worked at the ECB until April. “The ECB has already shouldered the main burden of the crisis. These are the same politicians that dithered last year and got the ECB to pick up the pieces.”

The cost of insuring against default on government debt sold by Greece surged to a record yesterday, according to traders of credit-default swaps. Contracts on Greece soared 30 basis points to 1,522, according to CMA. The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,356 basis points today.

The euro fell more than a cent against the dollar yesterday and traded at $1.4479 at 11 a.m. in Frankfurt.

The ECB started buying the bonds of distressed governments in May last year to help ensure the transmission of its monetary policy in money and credit markets.

ECB Purchases

The central bank has so far purchased 75 billion euros worth of assets in the secondary market under its Securities Market Program, which it stresses is temporary and not designed to finance governments. It may have purchased about 40 billion euros of Greek government bonds, Barclays Capital estimates.

It is also financing the banking systems of Greece, Portugal and Ireland, which have together received bailouts totaling 256 billion euros, by continuing to lend them unlimited amounts of money at its benchmark rate.

While the ECB is prevented by its founding treaty from buying bonds on the primary market, it “could be instrumental in convincing private bondholders to roll over by re-launching its SMP program on the secondary market,” said Gilles Moec, an economist at Deutsche Bank AG in London. Trichet’s comments are a “further confirmation that the Europeans are still far from a fully fledged solution,” he said.

‘Skeptical Voices’

Germany’s Schaeuble has called for Greek bondholders to extend the maturities of their debt by seven years to give Greece more time to cut its debt and budget deficit.

“We’re taking skeptical voices and warnings from the European Central Bank on the involvement of the private sector seriously,” Schaeuble said today. Still, “we have to insist on the participation of the private sector,” he said.

Governments are trying to reach agreement on a new aid package for Greece by a European Union summit on June 23-24. The International Monetary Fund has threatened to withhold its share of what remains of Greece’s original 110 billion-euro bailout until governments guarantee that the country’s financing needs for the next 12 months are covered. The IMF was due to turn over 3.3 billion euros this month.

European governments and the IMF would lend as much as an extra 45 billion euros to Greece under a new bailout plan that also includes roughly 30 billion euros in asset-sale proceeds and about 30 billion euros in rollovers by creditors, two people with direct knowledge of the talks said yesterday.

While a debt rollover has been gaining support among EU officials, credit rating companies have indicated that may still be considered a default because the threat of a Greek bankruptcy would pressure investors to accept such a plan.

“We exclude all elements which are not voluntary,” Trichet said. Asked if the ECB would roll over its own holdings of Greek government bonds if private investors agreed to do so, Trichet said: “It is certainly not our intention.”