Jean-Claude Trichet, president of the European Central Bank, attempted to shore up confidence in the eurozone’s rescue plan for Greece on Thursday 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, Mr Trichet used a press conference to stress the “very serious commitment” by eurozone leaders to help if needed, which he said “nobody should take lightly”.
A debt default, the ECB president added, was “not an issue for Greece”.
Mr Trichet also sought to end confusion over the eurozone’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 eurozone governments borrowed themselves.
But his comments could be controversial 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.
With the eurozone facing its biggest challenge since the launch of the euro in 1999, 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 eurozone rescue package, which would involve the International Monetary Fund, would work. There is uncertainty over the borrowing costs that would be imposed.
Eurozone leaders agreed last month that loans would “not contain any subsidy element”.
In one of his most awkward press conferences since he became ECB president in 2003, Mr Trichet was forced to explain why he was supporting a rescue package that would include substantial IMF financing. He argued the ECB’s objection had been towards a rescue solely by the IMF. “We wanted the governments of the eurozone to be up to their responsibilities,” he said.
Eurozone countries shared a destiny, Mr Trichet added, pointedly repeating his comments in German.
“There is a high stakes poker game going on and Mr Trichet played his hand the best he could,” said Julian Callow, European economist at Barclays Capital.
The ECB president was also pushed on to the defensive over changes to the rules by which the central bank provides liquidity to banks.
He confirmed that the ECB would not be reverting at the end of this year to previous minimum requirements for collateral put up by banks – which reduced the risk of Greek assets becoming ineligible.
The rule changes highlighted the ECB’s concern not to exacerbate the Greece crisis.
But with deliberate favours for an individual country flying in the face of the eurozone’s principles, Mr Trichet insisted that “we didn’t say that it was for any particular country”.
The ECB, meanwhile, left its main interest rate unchanged at the record low of 1 per cent for an 11th consecutive month.
Additional reporting by Jennifer Hughes