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3rd Oct 2022

European Central Bank chief does not exclude Greek default

  • 'We often give advice that is not followed,' said Trichet (Photo: Council of European Union)

European Central Bank chief Jean Claude Trichet on Thursday (21 July) said that he could not prejudge if ratings agencies would declare a 'selective' default of Greek bonds, but noted that eurozone leaders have prepared for that event with €55bnn for bank recapitalisations and improving the creditworthiness of Greek government debt.

Admitting that eurozone leaders had disregarded his advice on avoiding a selective default for Greece or any other 'credit event', Trichet however stressed that the leaders prepared themselves with the exact tools he recommended.

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He also insisted that the red line the ECB had set for private sector involvement in the second Greek bailout - that it be "voluntary, not compulsory" - had been respected by eurozone leaders.

It would be the first time in the history of the eurozone that one member country defaults, prompting government assistance and forcing the ECB to buy up bonds with no market value, but 'secured' by the EU bailout fund. Despite the leaders' reassurances that it is a one-off, this would create a precedent and may further spook markets when it comes to other euro-countries' debt and economic troubles.

At the closing press conference, the outgoing central banker put a brave face on the situation with his institution having been repeatedly adopted measures it had previously rejected or warned against.

"We've said from the very beginning: It is you [leaders] who are responsible. But they've also ignored our advice when they didn't respect the Stability and Growth Pact or when we had called for stronger economic co-ordination and measures to boost competitiveness," he said.

On the eve of the special eurozone summit, Trichet went to Berlin where German chancellor Angela Merkel had already been debating for hours with French President Nicolas Sarkozy on having banks involved in a second bailout for Greece.

The meeting lasted for another three hours, but in the end, Trichet accepted that private banks will be involved and that the ECB may have to buy up Greek bonds declared as "defaulted" by ratings agencies, as long as they are backed up by stronger and "sound" collateral from the EU's bailout fund, the EFSF.

And in case of a 'selective' Greek default, eurozone leaders have foreseen two measures recommended by the ECB, sid Trichet referring to €20bln to be pumped into ailing banks and €35bn for improving the creditworthiness of Greek government debt.

He said that eurozone leaders stressed clearly that the private sector involvement was a one-off due to "exceptional" conditions in Greece, and that this was "as much as we could get" so as to calm markets' concerns regarding similar measures for other bailed out countries, such as Portugal and Ireland.

The decision to give the EFSF more flexibility in order to prevent contagion and help out countries before they even have to ask for a bailout was also "strongly promoted" by the ECB, as well as the growth-boosting measures for Greece and technical assistance from the EU and the IMF.

"But in the end the main issue is implementation and hard work done by Greece," Trichet said, once more stressing the need to for the Mediterranean country to sell its state-owned companies and assets, a programme Athens estimates to be worth €50bn.

"Privatisation is key and it is a big card in its hands, there isn't any other country with such big assets," the Frenchman said.

Implementation as desired by the ECB still has a rocky way ahead, as the country's trade unions are carrying out one protest after another against the austerity measures and deregulation efforts of the Greek government.

For the fourth day in a row, Greek taxi drivers on Thursday blocked ports and airports on the islands of Crete and Corfu - both Meccas for tourists from all over Europe.

The cab drivers are fighting a licensing overhaul which would make it easier for newcomers to compete on the market, a measure which is part of the reform package agreed in the EU-IMF bailout conditions.

Tourism makes up 16 percent of Greece's GDP and the government had counted on a 10 percent increase in revenues from this sector this year.

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