Trichet Says Greece Won’t Receive ‘Special Treatment’ (Update2)

By Jeffrey Donovan and Frances Robinson
Jan. 14 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said Greece won’t win any special treatment from European officials, increasing pressure on the country to cut the continent’s biggest budget deficit.
"No government, no state can expect any special treatment," he said in Frankfurt today when asked about Greece.
"Some governments, one in particular, have very difficult decisions to take."
Greek Prime Minister George Papandreou is struggling to convince investors and other European leaders he can get the deficit under control after rating downgrades last year sparked a rout in the country’s bonds. German Chancellor Angela Merkel said yesterday that Greece’s fiscal woes could hurt the euro and its bonds extended declines today even after the government approved a plan to push the deficit below the EU’s limit.
The yield on the 2-year note rose 38 basis points to 3.44 percent. The premium investors demand to buy those bonds over comparable German debt rose to 234 basis points, the widest spread since Dec. 21. Trichet spoke after the ECB left its benchmark interest rate unchanged at 1 percent and signaled he’s in no rush to accelerate the withdrawal of emergency policies introduced during the financial crisis.

‘Heightened Tensions"

Trichet’s remarks on Greece show that the ECB "has clearly chosen to maintain its pressure on the Greek government, rather than easing the heightened tensions in bond markets,"
Laurent Bilke, a former ECB economist now at Nomura International Plc in London, said in an e-mail.
The concern about Greece’s ability to tame its deficit is putting the entire euro region "under great, great pressures,"
and threatens to hurt the single currency, Merkel said at a private forum yesterday.
"The euro is in a very difficult phase over the coming years," she said, according to a transcript posted on the German government’s Web site today.
The euro fell against 10 of its 16 most-traded peers after Merkel’s remarks, weakening to $1.4481 from $1.4510 yesterday.
The dollar will continue to gain in the next month as concern about Greece weighs on the euro, said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York.
"By talking about the individual problems of Greece you’re just reinforcing that problem of the euro," he said.

Rating Cuts

Fitch Ratings, Moody’s Investors Service and Standard & Poor’s cut their ratings on Greece in December. That fanned concerns Greek government bonds will be excluded from ECB market operations when collateral rules are returned to pre-crisis levels at the end of this year.
"We will not change our collateral policy for the sake of any particular country," Trichet said.
Greece’s record deficit and growing debt, which is set to top 120 percent of GDP this year, twice the EU limit, have sparked investor concern about a possible default.
Trichet nevertheless today dismissed as an "absurd hypothesis" the argument that Greece could be forced to exit the euro area. He also played down the importance of Greece’s economy on the euro region, which he said represents less than 3 percent of the bloc’s GDP, especially when compared with the size of a U.S. state such as California.

EU Support

Greece deserves the backing of the EU to overcome its financial woes, said Elena Salgado, the finance minister of Spain, which holds the EU’s rotating six-month presidency. She travels to Athens today to meet her Greek Counterpart George Papaconstantinou. "It’s important that he feels the support from the European Union," Salgado said in Rome today.
In Athens, Papandreou today pledged to "do whatever it takes" to rein in the budget shortfall and restore confidence in the country’s finances when he presented the three-year budget plan.
"Our country can and is obliged to exit as soon as possible this vicious circle of misery," he said. "We will not retreat; we will proceed quickly."
The plan calls for about 10 billion euros ($14.5 billion) of spending cuts and revenue increases this year to bring the shortfall from 12.7 percent of output to 8.7 percent by year- end. That deficit reduction comes as the government forecast that economic growth will contract for a second year in 2010, weighing on revenue.
The plan, which will be presented to the European Commission tomorrow, includes more than 7 billion euros in revenue-raising measures. Those include some higher taxes and gains from a crackdown on tax evasion and the dodging of social security payments to the pension system.
Spending cuts, including trimming benefits to civil servants, were worth 3.6 billion euros.
Trichet said the ECB will study the measures "carefully."