EUROPEAN CENTRAL Bank (ECB) chief Jean-Claude Trichet faced down pressure for new moves to shore up the weakest euro zone countries, but kept his options open even as he said Spain and Portugal were “not Greece”.
As the euro dropped to new lows yesterday amid fears of sovereign debt contagion in the euro zone, Mr Trichet sought to boost the €110 billion EU/IMF rescue of Greece by saying he saw no danger that any euro zone country would default on its debt.
His remarks failed to calm investors, as Spanish and Portuguese bond yields rose, stocks fell and the cost of insuring against sovereign default increased.
The euro sank as low as $1.2681, its weakest level for 14 months, and the MSCI World Index of 23 developed nations lost 1.8 per cent to continue a three-day decline to 5.4 per cent.
The “spread” or premium that investors demand to hold Spanish 10-year debt instead of German bunds rose to 1.61 percentage points, the highest for 13 years.
Madrid yesterday paid a yield 0.716 percentage points more than nine weeks ago when it sold €2.35 billion in five-year bonds, the most since 2008. Markets had hoped for a signal after the regular ECB governing council meeting that the bank would buy government bonds to relieve pressure on the weakest euro zone countries.
Although Mr Trichet did not express any view on the merits of such a move, he said the bank’s policymakers did not even discuss this yesterday. At their meeting, in Lisbon, they left the bank’s core interest rate steady at 1 per cent, an historic low. Mr Trichet called for bold moves from other euro zone governments to restore order in their public finances.
“We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances.” His stance on Spain and Portugal – that their fiscal problems are in no way as serious as those in Greece – is at one with the mantra from government leaders and EU chiefs.
However, the European authorities have acknowledged the gravity of the tensions in markets. “It doesn’t touch Greece alone. It has to do with the euro zone as a whole,” said economics commissioner Olli Rehn. “We have to make sure we can stop that fire so it won’t spread to other countries as well.”
German finance minister Wolfgang Schäuble described the turmoil as a “fundamental crisis” with the euro’s stability at stake, but ruled out any restructuring of Greece’s debt.
“If we were to have a debt restructuring, then we would have – and we are all saying this – exactly the kind of conflagration that we could no longer control.”
The leaders of the 16 euro zone group countries are set to review the latest outburst of market turmoil when they gather in Brussels tonight to definitively endorse the Greek rescue.
In advance of the summit, German chancellor Angela Merkel and French president Nicolas Sarkozy called for reflection on the role of rating agencies in crisis propagation following a move decision of rating agents Standard Poor’s to downgrade Greece before the rescue deal was finalised.
The leaders are likely to express strong support for Greek premier George Papandreou at their emergency summit, which comes a day after the Greek parliament’s adoption last evening of the austerity plan tied to the loan fund.
In a research note, credit rating agents Moody’s included the Irish banking system alongside Portugal, Spain and Italy in a report which highlighted the “contagion risk for banks stemming from the deterioration of their domestic sovereign credit profile” and related market pressures.
“The potential for contagion from their sovereign as observed in Greece is also spreading to some other countries, and to the extent this affects these countries it could dilute some of the inherent differences of the banking systems and impose a common threat,” Moody’s said.
