Trichet Thwarted as Greece Erodes ‘Mr. Euro’ Status

April 9 (Bloomberg) -- Mounting speculation that Greece will default on 304.2 billion euros ($405.2 billion) of debt is depriving European Central Bank President Jean-Claude Trichet of the stable markets needed to bring Europe out of its worst post- war recession.

Since early February when politicians began squabbling over how to rescue Greece from Europe’s largest deficit as a percentage of gross domestic product, the euro has lost 4.1 percent against the dollar and the extra yield demanded by investors to hold Greek debt rather than German bunds increased as much as a record 4.43 percentage points as traders saw a greater risk of default. Trichet, who was supposed to spend his final year in office nurturing the region’s nascent recovery, finds himself powerless to resolve the crisis because he has no control over fiscal policy.

“Trichet is essentially an observer in the current crisis,” said Colin Ellis, an economist at Daiwa Capital Markets Europe Ltd. in London and a former Bank of England official. “He does not hold the levers of power.”

Greece is highlighting the limits of Trichet’s ability to maintain confidence in the euro, which is facing its biggest challenge since he helped bring it into being in 1999. Trichet, who described himself as ‘Mr. Euro’ in 2006, has no say over how taxpayers’ funds should be used to rescue Greece. EU leaders rebuffed a March 4 warning from Trichet that involving the International Monetary Fund in a rescue would show that Europe was incapable of solving its own crises.

Euro Gains

The euro extended yesterday’s gains and traded at $1.3388 at 9:42 a.m. in Frankfurt after Trichet said in an interview with Italy’s Il Sole-24 Ore newspaper that Greece won’t need a bailout “at this moment.” The spread between Greek and German 10-year yields is still 423 basis points. A basis point is 0.01 percentage point.

Trichet, whose eight-year term ends in October next year, yesterday attempted to answer reporters’ questions about the interest rates that Greece would have to pay for emergency funds and explain his stance on the IMF’s role in a bailout.

“He’s one of the brightest central bankers out there, but it’s getting too complex,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc. “He has to fit into a political world and that’s what he’s uncomfortable with.”

Merkel Casts Doubt

Trichet, 67, is trying to protect the euro as politicians refuse to fully explain how they would rescue Greece should it fail to raise money in financial markets. While leaders said on March 25 that they would co-finance a bailout with the IMF, they never spelled out when aid would be forthcoming or how much it would cost.

German Chancellor Angela Merkel also has questioned whether her taxpayers should be asked to help fund Greek excess, casting doubt on her commitment to any rescue package. As Greek bonds plunged yesterday, a German government official reiterated that a rescue package would only be a last resort.

“The communication exercise here becomes a monstrous problem,” said Peruzzo. “I’m not sure whether it’s possible for a human to cope with the tensions in the topics we’re discussing at this stage.”

The Greek government aims to cut the budget deficit this year to 8.7 percent of GDP from last year’s level of almost 13 percent, more than four times the EU limit and the highest for any country in the euro’s history. Athens this week revised the 2009 deficit to 12.9 percent of GDP from 12.7 percent because of the size of the economic contraction.

‘Wrong Place’

Some economists say it’s unfair to expect Trichet to calm investors’ jitters about Greece because budget policy lies with governments.

“He’s the focal point because he has the press conference and there is nobody more at the center of European finance and policy,” said Julian Callow, chief European economist at Barclays Capital in London. “So people are looking to him for guidance, but they are looking in the wrong place. This is a political issue.”

The ECB also is doing its bit to help Greece by loosening its collateral rules, easing some investors’ concerns that Greek bonds could become ineligible in ECB money-market operations next year.

The crisis nevertheless puts the ECB’s chief in an unusual position. Trichet has helped shape Group of Seven currency communiqués over the past two decades and has successfully used the threat of foreign-exchange intervention to steer the euro in the past.

‘I Sign the Notes’

In January 2004, he warned investors against “brutal” currency moves after the euro’s 21 percent surge against the dollar in the previous year. The euro dropped 7 percent over the next four months.

“I am Mr. Euro,” he told reporters in June 2006. “We are issuing the currency, I sign the notes.”

With the political debate over Greece’s future eroding Trichet’s influence for now, EU leaders are coming under pressure to resolve the crisis.

“It’s total paralysis at both levels, it’s incredible,” said Paul De Grauwe, a professor at the Catholic University of Leuven in Belgium. “It’s really a relatively small problem. What is Greece -- nothing in a way, the relative size of the Greek economy -- and they are unable to come up with a clear policy.”