Trichet warns Greek debt failure means interference

European Central Bank President Jean-Claude Trichet warned on Thursday that a Greek failure to stabilise its economy on its own would increase pressure for the international community to do it.

The ECB chief suggested creating a second stage of bailouts under which the eurozone would take limited control of a member country’s economic policies if it was not able to successfully implement adjustment programmes.

“Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray?,” said Trichet.

“A direct influence, well over and above the reinforced surveillance that is presently envisaged?,” he said in the western German city of Aachen after receiving the Karlspreis award for advancing the European cause.

Trichet did not name Greece directly but the EU, ECB and IMF are currently heaping pressure on Athens to redouble efforts to rebalance its finances in order to secure the next installment of a 110-billion-euro ($158-billion) bailout loan agreed in May 2010.

Greece may need up to 70 billion euros ($100 billion), on top of the existing EU-IMF loan, to keep from going bankrupt as it is unlikely to be able to return quickly to international borrowing markets.

Trichet’s comments dovetailed with the those of the ECB’s chief economist, Juergen Stark, who told Italian business daily Il Sole 24 Ore that if Athens does not take the necessary measures, then it would become necessary for other parties to “interfere.”

“If countries in difficulty do not introduce the necessary adjustment measures, then interfering in their national policy could be a necessary way of ensuring the correct functioning of monetary union,” Stark added.

Trichet said providing assistance to eurozone members who face difficulties in adjusting their economies is in the interest of the entire currency bloc to prevent a crisis from spreading.

“It is of paramount importance that adjustment occurs; that countries — governments and opposition — unite behind the effort; and that contributing countries survey with great care the implementation of the programme,” he said.

Greece’s main opposition conservative party has rejected the austerity programme and the ruling Socialists have only a narrow majority in parliament.

Trichet said that under current bailouts, all decisions remain in the hands of the country concerned, even if policy recommendations are not implemented and this triggers difficulties for other eurozone members.

“In the new concept, it would be not only possible, but in some cases compulsory, in a second stage for the European authorities … to take themselves decisions applicable in the economy concerned.”

Trichet suggested assigning this role to a new eurozone finance ministry.

Such a ministry would not necessarily need to be one that administers a large budget, he said, but be charged with “the surveillance of both fiscal policies and competitiveness policies” of eurozone members.

This would include more ‘hands-on’ management of members with needing stage bailouts.

The debate over a second bailout for Greece has largely pitted the ECB against Germany on involving private investors in Greek bonds but the latest comments may indicate that the guardian of the euro wants greater control over implementation of rescue programmes as part of any compromise.

The ECB has vociferously opposed forcing private investors to accept losses or delaying repayment, which would likely be considered a default by credit agencies.

However, Stark suggested the ECB could be open to a rollover of Greece’s debt under which creditor banks would be persuaded to buy new bonds from Athens to replace maturing securities, thereby ensuring continued financing.

“If this is not seen as a default or a partial default on sovereign debt, then it could indeed be a way of involving the private sector in financing Greece,” Stark said.