ECB Update: On Collision Course With Governments Over Greece
FRANKFURT (MNI) - European Central Bank President Jean-Claude Trichet sharpened his tone over the weekend, warning governments against letting Greece default just days ahead of the emergency summit at which Eurozone heads of state and government may decide to do just that.
"If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country," Trichet said in an interview with Financial Times Deutschland. "The responsibility for this lies with the governments. The governments have been warned, in no uncertain terms and using all possible means."
Should governments go ahead with restructuring plan, they will have to provide a solution to keep Greek banks alive, Trichet said. In effect, this may mean that governments will have to inject so much fresh capital into Greek banks that a large chunk of any private sector contribution would be eaten up rendering the deal financially useless.
German chancellor Angela Merkel continues to insist that private sector involvement must be part of a new deal for saving Greece. While she said she hopes to avoid a default scenario, rating agencies have warned that plans floated thus far would all lead to selective default.
In another sign of hardening fronts, one of the ECB's most outspoken critics of any form of Greek debt restructuring, let alone a Eurozone breakup, appeared for the first time to allow for the possibility that Greece could actually leave the Eurozone if it is unable to address its problems effectively.
Asked whether he was worried about the viability of the euro as a currency, Bini Smaghi said: "The Greeks for example want to stay in the euro, but for this to happen they have to put their house in order. They have to face reality."
Instead of a private sector contribution that would lead to default, the ECB is pushing for an expanded role of the European Financial Stability Facility (EFSF), which would allow it to buy government debt in the secondary market.
Trichet, Bini Smaghi and Yves Mersch over the weekend all called for stepping up flexibility of the fund to include the possibility of secondary bond market intervention.
"This would allow the private sector to sell bonds at their market value which is currently lower than the nominal value," Bini Smaghi said. "This would allow the private sector to sell while the public sector would save money. But such an option was not included in the design of the EFSF. If there is a way to change the EFSF, that would be useful."
Trichet said that instead of coming up with new tools, such as Eurobonds, "what counts now is that we make optimal use of the instruments at our disposal." In particular, "the European Financial Stability Facility (EFSF) should be used as flexibly and effectively as it possibly can be," he asserted, using code language that essentially means it should be allowed to buy bonds.
At last week's Eurogroup meeting, finance ministers said they had decided to enhance "the flexibility and the scope of the EFSF." However, their statement did not specify whether this flexibility would include the ability to buy bonds on the secondary market.
In another sign that the ECB is no longer ready to offer central bank support where its deems fiscal support warranted, Mersch indicated that the ECB has not resumed its bond buys as markets had speculated last week. With the EFSF in place "we can consequently defend the strict distinction between monetary and fiscal policy," Mersch said.
Trichet said that the ECB will not do anything that would impair its "ability to be an anchor of confidence and stability" -- words echoed by Mersch, who said the central bank will focus instead on its main mandate of delivering price stability.
In order to do so, further rate hikes may be warranteed, Mersch hinted.
While he said that the ECB had not announced "a series of rate hikes" and is "never pre-committed," he also observed that "risks to growth are balanced, while risks to price stability lie on the upside," and the monetary pillar show no credit constraints.
At the same time, real interest rates are still negative, Mersch observed. "The whole available theory tells us about the danger of too-long periods of negative real rates. This is also an argument and we discuss it at every meeting in order to reach our goal of price stability in the medium term."