As Euro slides, European Central Bank stays the course
As the Greek debt crisis rocks the eurozone, European Central Bank President Jean-Claude Trichet downplayed fears that Portugal and Spain would need to be bailed out.
European Central Bank President Jean-Claude Trichet on Thursday downplayed market fears that Portugal and Spain could need bailouts after Greece, but failed to announce any new measures to help ease the debt crisis that is engulfing the eurozone.Skip to next paragraph
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Trichet put the blame for the crisis, which is raising questions about the euro currency's future, firmly on Europe's governments for tolerating lax budgetary controls for years - and before the financial crisis erupted in late 2007.
However, he insisted that Greece was an outlier.
"Portugal and Greece are not on the same boat, and this is very visible when you look at the facts and figures," he told a press conference after the Bank held its benchmark interest rate at the record low of 1 percent for the twelfth month running. "Portugal is not Greece. Spain is not Greece."
Trichet said the bank's governing council did not discuss buying government bonds - one anti-crisis measure some economists are calling for - nor the need to create an orderly default mechanism for the eurozone, as urged by others.
"We did not discuss this option," Trichet said. "We did not discuss at all anything like default or such default procedures."
There has been widespread speculation in the markets that the bank may take further steps to keep the debt crisis in Greece from spreading to other countries and dragging down the euro, which has been falling by the day.
"If recent track record is anything to go by, that doesn't mean that they won't be buying government bonds pretty soon," he said.
Trichet ruled nothing out - though he unveiled no new crisis measures, he held out the possibility that the bank was "permanently on the alert and capable of taking the appropriate decisions even if they are unconventional."
However, he mostly urged governments to take on the burden of cutting debt and getting their houses in order.
"We ask each institution to take its own responsibility.. to take its own decision commensurate with its own responsibility," he said.
Though the bank is prohibited from bailing out profligate governments, a number of analysts think the Bank could sanction bond purchases by pointing to the need for maintaining stability in the eurozone - buying bonds would help support bond prices and keep rates low as well as supporting the balance sheets of banks holding them.
Trichet backed the Greek government's plan to get a handle on its budget deficit, which is currently being debated in the Greek Parliament. Greece has been required to make further spending reductions and tax increases in return for getting a euro110 billion ($140 billion) financial bailout package from its 15 partners in the eurozone and the International Monetary Fund.
He also dismissed suggestions that Greece will end up defaulting on its debt even after getting the money. "Default for me is out of the question," Trichet said.
The markets remain skeptical about the Greek government's ability to push through the austerity required and Wednesday's tragic death of three people in a bank in Athens during a 100,000 strong protest have done nothing to increase optimism. That is evident in the performance of the euro, which at one point had slid another 1 percent to a 14-month low of $1.2692, before recovering somewhat to $1.2750.
Trichet also hinted that there was some opposition on the governing council to the Bank's surprise announcement earlier this week to scrap the rating requirement for Greek debt to be used by banks as collateral for ECB credits. That will support Greek bond prices and the banks holding the bonds in case Greece is hit with further ratings downgrades.
Trichet said there was "an overwhelming majority" in favor of the move, in contrast to the "unanimous" agreement to backing the bailout and keeping interest rates at the record low of 1 percent.
On the broader economy, Trichet said inflationary pressures over the medium term remained contained and that the eurozone economic recovery was continuing - figures next week are expected to show that the eurozone economy grew modestly in the first three months of the year.
"We expect the euro area economy to expand at a moderate pace in 2010, but growth patterns could be uneven in an environment of high uncertainty," Trichet said.