Trichet Pressures Papandreou as Greek Bonds Fall
European Central Bank President Jean-Claude Trichet intensified pressure on Greece to cut the continent’s biggest budget deficit with a warning that the country won’t get any favors from policy makers.
As Prime Minister George Papandreou struggles to convince investors and European Union governments he can regain control of the country’s budget, Trichet yesterday said no nation can expect any “special treatment.”
“The central bank has clearly chosen to maintain its pressure on the Greek government, rather than easing the heightened tensions in bond markets,” said Laurent Bilke, a former ECB economist now at Nomura International Plc in London.
Greek bonds extended declines after Trichet’s comments, which came after the ECB left its benchmark interest rate at a record low of 1 percent. While Greece was his main target, Trichet told other euro members to take the “difficult decisions” needed to tackle “sharply rising” budget gaps or face higher borrowing costs that hurt economic growth.
The Greek remarks eclipsed those made on monetary policy as officials turn their attention from the financial crisis to the nations most hurt by the recession. German Chancellor Angela Merkel said in comments published yesterday that Greece’s fiscal woes could hurt the euro and Luxembourg Prime Minister Jean- Claude Juncker said International Monetary Fund aid wouldn’t be “appropriate.”
Collateral
Rating downgrades sparked a rout in Greece’s bonds in December as investors tuned into a budget deficit of 12.7 percent of gross domestic product, more than four times the European Union limit. The yield on the 2-year Greek note today rose 6 basis points to 3.559 percent, extending yesterday’s gain of 44 points.
Arguing that it has received enough of a benefit from euro membership, Trichet said the ECB won’t help Greece by delaying the reintroduction of its pre-crisis collateral rules at the end of 2010. Downgrades by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s have fanned concerns its bonds will be excluded from the ECB’s market operations.
“We will not change our collateral policy for the sake of any particular country,” Trichet said.
The subsequent selloff suggests the market “still harbors hopes that the ECB would abort its collateral decision,” said Elga Bartsch, chief European economist at Morgan Stanley in London guaranteed high risk personal loans. Juergen Michels, chief euro-area economist at Citigroup Inc., said the ECB will ultimately agree to rules “that do not put too much additional pressure on member countries.”
Short Shrift
Trichet also downplayed the importance of Greece for the euro region as a whole. While Greece makes up about 3 percent of the bloc’s GDP, 13 percent of the U.S. economy is accounted for by California, which is also suffering financial difficulties.
Those remarks drew short shift from Andrew Bosomworth, a former ECB economist and now head of portfolio management at Pacific Investment Management Co. in Munich. He warned Greece could still cause “contagion” to other economies with poor finances such as Portugal or Spain.
“While each of those countries in their own right may not be very big, or a threat to the euro area, if one of them were to go you have potential domino effect that could snowball into a big problem for the euro area,” Bosomworth said in a television interview yesterday.
Marco Annunziata, chief economist at UniCredit Group in London, said policy makers are playing a “nerve-wracking game of chicken” in the hope that their tough rhetoric will pressure Greece into action.
Budget Shortfall
“If a rescue turns out to be necessary, a rescue operation will be mounted,” Annunziata said.
In Athens, Papandreou yesterday pledged to “do whatever it takes” to rein in the budget shortfall and restore confidence in the country’s finances when he published the three-year budget plan.
The government’s latest proposals, to be presented to the European Commission today, call for about 10 billion euros ($14 billion) of spending cuts and revenue increases this year to bring the shortfall from 12.7 percent of output to 8.7 percent by year-end.
“Our country can and is obliged to exit as soon as possible this vicious circle of misery,” Papandreou said. “We will not retreat; we will proceed quickly.”