Trichet Doesn’t Expect Greece to Default (Update2)

April 8 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said he doesn’t expect Greece to default on its debts and he’s confident the country will solve its budget problems even as investors dump its assets.

“A default is not an issue for Greece,” Trichet told reporters in Frankfurt today. Referring to Greece’s budget program, he said: “I have no reason to consider that it is not implemented rigorously.” Trichet made the remarks after the ECB left its benchmark interest rate at a record low of 1 percent, as predicted by all 62 economists in a Bloomberg News survey.

Greek bonds plunged this week on renewed concern that the country won’t succeed in cutting the European Union’s largest budget deficit. Prime Minister George Papandreou’s government needs to sell 11.6 billion euros ($15.4 billion) of debt by the end of next month. The premium demanded by investors to hold Greek 10-year bonds over German counterparts rose today to the biggest since the euro’s debut in 1999.

Trichet “tried everything not to add fuel to the fire” on Greece, said Carsten Brzeski, an economist at ING Group in Brussels.

The euro rose half a cent after Trichet’s remarks to $1.3347 at 5:20 p.m. in Frankfurt. Greek government bonds pared their decline, leaving the yield on the two-year note 93 basis points higher at 7.90 percent. The yield earlier rose as much as 210 basis points to 9.06 percent.

‘Workable Framework’

Trichet declined to comment on market movements.

The higher interest rates make it more difficult for Greece to raise the funds it needs. The nation must borrow a total of 32 billion euros this year, Petros Christodoulou, director general of the Public Debt Management Agency in Athens, said on March 31.

Euro-region leaders last month endorsed a Franco-German proposal to help Greece with a mix of International Monetary Fund and bilateral loans at market interest rates that would be triggered only if Greece runs out of fund-raising options.

While Trichet said any loans would not be subsidized, he suggested their interest rates could be determined by the refinancing costs of those that issue them, not Greece’s current market rates.

Trichet called the package “a workable framework” and denied he had opposed IMF involvement.

“We never said the IMF doesn’t have very good expertise,” he said, adding the position of the ECB “has always been to say that we wanted the governments of the euro area to be up to their responsibility.”

Delayed Exit

The Greek crisis is complicating the ECB’s withdrawal of the emergency measures it used to fight Europe’s worst recession since World War II. The ECB predicts the euro-region economy will expand 0.8 percent this year after contracting 4.1 percent in 2009.

Trichet confirmed today that the central bank will maintain looser collateral rules beyond the end of the year. He also said the ECB’s benchmark rate is “appropriate,” signaling it’s in no rush to raise borrowing costs.

Economists have pushed back expectations for ECB rate increases and now don’t expect a move until the first quarter of 2011, a Bloomberg survey shows. A month ago, the median forecast was for the ECB to raise borrowing costs in the fourth quarter of this year.

The Bank of England kept its benchmark interest rate unchanged at a record low of 0.5 percent earlier today and held its bond-purchase plan at 200 billion pounds. In the U.S., the Federal Reserve has maintained its pledge to keep rates at a record low for an “extended period.” By contrast, the Reserve Bank of Australia this week raised its key rate for a fifth time in six meetings to 4.25 percent.

To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Frances Robinson in Frankfurt at frobinson6@bloomberg.net.

Last Updated: April 8, 2010 11:31 EDT

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