ECB governor lends support to Athens

European Central Bank (ECB) Governor Jean-Claude Trichet yesterday stated his belief that Greece will press ahead with the essential reforms to rehabilitate the country’s public finances. »Taking into account the situation that the new government of the country must face as far as the fiscal situation is concerned, I have the confidence that the appropriate decisions will be made,» the French banker said, adding that he was expressing the conclusions of the talks held in the previous days at the Eurogroup and Ecofin councils of finance ministers. This statement, which lends support to Athens, came after Trichet announced that the ECB will discontinue the supply of limitless cash flow to banks through auctions of 12-month loans. As soon as this was announced, the interest rate spread between Greek 10-year bonds and benchmark German Bunds rose to 175 basis points, from 163 on Wednesday. However it declined to 166 bps by the end of trading yesterday. The government will now have to prove it can utilize the brief grace period it recently secured from the European Commission and submit at a Stability and Growth Program at the end of January that will contain all the essential structural reforms and an analysis of how the deficit will decrease. This is because there is a difference in opinion about the pace of fiscal adjustment through the measures of a permanent character included in the draft budget. The government maintains that they represent 2 percent of gross domestic product while the Commission calculates just over 1.5 percent of GDP.

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