Pragmatic ECB steps back on Greek rescue plan

22nd July 2011, Comments 0 comments

The European Central Bank, (ECB), which has worked hard to prevent a Greek debt default, seems to have finally come to terms with the idea.

Economists say the bank acted in the best interests of the 17-nation eurozone however.

"It was quasi impossible to avoid a default and the ECB admitted that," said Deutsche Bank economist Gilles Moec.

"Trichet is a real statesman. He showed it in this crisis. If he has to make a U-turn he will do it for the good of the monetary union."

Trichet was firmly opposed to any kind of aid for Greece that would lead to any kind of default by Greece.

ECB president Jean-Claude Trichet said late on Thursday that agreement would would not trigger a "credit event" that would lead to the payment of insurance known as credit default swaps, but did not rule out that Greece could be deemed in partial default on its debt.

"We make our arguments but we are not always heard," Trichet said.

He had gone late on Wednesday to Berlin a few hours ahead of the eurozone summit in Brussels on the Greek debt crisis, which threatened to pull down larger economies such as those of Italy and Spain as well.

Trichet had joined a meeting of German Chancellor Angela Merkel and Nicolas Sarkozy who were seeking common ground on how to deal with the crisis.

"Apparently, the ECB has given ground but I think it played a major role in the talks," said Marie Diron, senior economist at Ernst & Young.

"It staunchly defended its position until the last moment so governments had to assume their responsibilities," Diron added. "And when the governments reached out, it did too."

The ECB sees two of its demands met.

Private sector involvement in a Greek rescue plan will be limited to Greece, and the European Financial Stability Facility (EFSF), which was created to lend to governments in difficulty, will start buying Greek debt on secondary markets, something the ECB has called for repeatedly.

Until now, only the ECB had purchased sovereign debt, a role it accepted reluctantly.

Four months ago however, the central bank stopped buying government bonds, after seeing that the governments were getting used to the measure, which was supposed to be temporary.

The ECB also pressed for the EFSF to take on a greater role in providing other kinds of support for eurozone governments, and according to diplomats, the EFSF will also guarantee Greek bonds, allowing the ECB to continue accepting them even if ratings agencies say the country is in partial default.

The EFSF should now also take part in a recapitalisation of European Banks, Moec said.

"The ECB cannot continue with a system in which it offers liquidity" to under-capitalised banks, he said.

The ECB will also have to rethink its monetary policy.

Having launched a series of interest rate hikes in April to combat inflation that is well above its target of just under 2.0 percent, it might now delay a hike many expected sometime from October on, IHS Global Insight chief economist Howard Archer said.

Diron warned that "the risk of inflation is much less than that posed by a failure of the (rescue) process. We could fall back into recession."

© 2011 AFP

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