Trichet dismisses fears of Greek default

THE PRESIDENT of the European Central Bank has attempted to shore up confidence in the euro zone’s rescue plan for Greece yesterday, as shares on the Athens stock market tumbled and the country’s borrowing costs soared.

As the continued volatility in financial markets increased pressure on Athens, Jean-Claude Trichet used a press conference to stress the “very serious commitment” by euro-zone leaders to help if needed, which he said “nobody should take lightly”.

A debt default, the ECB president said, was “not an issue for Greece”.

Mr Trichet also sought to end confusion over the euro-zone’s rescue package by saying how interest rates could be set on emergency loans to Athens.

He suggested that the interest rate charged on such loans could be as low as the rate at which other euro-zone governments borrowed.

His comments may not be well received in Germany, which wants Greece to pay market interest rates.

“You are saying to the German taxpayer that they should lend at a lower rate than their own pension funds,” said Erik Nielsen, European economist at Goldman Sachs.

Mr Trichet’s intervention brought little relief for Greece.

Shares on the country’s stock market slumped, with its banks closing 6.4 per cent lower and the broad index off 3.1 per cent. Greek government bonds also fell sharply, with the yield on the 10-year bond touching its highest since December 1998.

Confidence in Greece has plummeted because of the lack of detail over how the proposed euro zone rescue package, which would involve the International Monetary Fund, would work.

The ECB extended a helping hand to Greece by prolonging easier rules on debt eligible as security against cheap central bank cash.

Government debt – including Greek bonds – will also be exempt from tougher new risk margins for riskier assets, although banks will still receive less money in return for Greek bonds if the country’s credit rating deteriorates further.

Mr Trichet denied the changes were designed to help Greece, currently rated BBB+ by two of the three major credit ratings agencies.

“We didn’t say that it was for any particular country,” Mr Trichet told a news conference after the ECB kept rates on hold at a record low of 1 per cent for the 11th month in a row. – (Reuters and Financial Times service)