Trichet Tells EU Parliament To Stick To Rescue Deals
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By Geoffrey T. Smith
Of DOW JONES NEWSWIRES
FRANKFURT (Dow Jones)--Talk of forcing losses on those who are currently holding euro zone sovereign debt is idle, European Central Bank President Jean-Claude Trichet said Monday.
Addressing the European Parliament in his capacity as head of the European Systemic Risk Board, Trichet stressed that no such step is foreseen in the rescue deals agreed for Ireland and Greece, and said that to change that would reward those who have speculated against the cohesion of the euro zone.
"Modern markets are made of investors that are long, and investors that are short," Trichet said. "Investors that are long are losing money," when debt restructurings are forced upon bondholders, he added.
Trichet was more equivocal when asked about the possibility of a voluntary restructuring of Greek debt financed by the European Financial Stability Facility, or EFSF. Talk has coursed through the markets that the EFSF would lend Greece money to buy back and retire its debt at a sharp discount to face value from any willing sellers. The most likely willing seller would be the ECB itself which, according to analysts' estimates, holds upwards of EUR50 billion on Greek sovereign debt.
In a debate in which he frequently stressed the systemic nature of the risks of excessive debt both at the level of sovereigns and households, Trichet said that cooperation with the EFSF is one thing "that we will have to look at."
He wasn't any more specific. He added, however, that the scope and pace of debt reduction by households in the euro zone had been "substantial" rather than "dramatic".
As at a previous press conference to mark the first meeting of the ESRB, Trichet appeared uncomfortable when pressed on the potential conflict of interest between his function in the ESRB and his job as ECB president, which explicitly requires him to prioritize price stability over the stability of the financial system. Asked whether he would raise interest rates even at the risk of overall financial stability, he said that this was a question of monetary policy.
Later on, he argued that price stability should be thought of as a "necessary, but not sufficient, condition" for financial stability. However, he acknowledged that the euro zone's overall framework for guaranteeing macro-economic stability had been found wanting by the crisis. As the credit bubbles in the Spanish and Irish real estate markets weren't accompanied by excessive budget deficits, there was no institutional way to keep them under control, Trichet said.
"One of the lessons of the crisis is that you have to go further to understand what is really structural," he said. "If you are in a boom, it's easy to fulfil the Maastricht criteria."
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