Trichet Halts Greece’s Courting of IMF, Stirs European Tensions

By James G. Neuger and Simon Kennedy
March 5 (Bloomberg) -- European Central Bank President Jean-Claude Trichet pressed Greece to halt its flirtation with International Monetary Fund aid and work with European allies to tame its record budget deficit.
As protesters besieged the Greek Finance Ministry to denounce 4.8 billion euros ($6.5 billion) of tax increases and spending cuts, the Athens government said the absence of European support might force it into the hands of the IMF.
Trichet yesterday spoke out against appealing to the Washington-based lender "as a supplier of help," keeping the pressure on Greece to cut the highest deficit in the euro’s 11- year history -- and on European governments to step in if Greece can’t go it alone.
"For Trichet, using the IMF would be an admission that Europe can’t deal with its own business," said Gilles Moec, a senior economist at Deutsche Bank AG in London and a former Bank of France official. "Trichet’s very keen on saying that Europe has its own system of safeguards. He went almost as far as saying Europe has something in the pipeline."
The region’s biggest deficit spender collides with Europe’s largest economy when Greek Prime Minister George Papandreou meets tonight in Berlin German Chancellor Angela Merkel, co-author of a Feb. 11 European pledge of "determined and coordinated action, if needed" to aid Greece.

Domestic Pressure

Facing political pressure at home not to squander German taxpayers’ money, Merkel said two days ago that tonight’s Berlin encounter won’t be "about aid commitments."
Starting five days of financial diplomacy that take him to Berlin, Luxembourg, Paris and Washington, Papandreou pushed for European help in getting credit at rates below the 6.11 percent investors currently demand on Greek 10-year bonds. Papandreou will meet with U.S President Barack Obama and not the IMF in his swing through Washington.
"We’re not asking for money," Papandreou said in an interview in today’s Frankfurter Allgemeine Zeitung. "We don’t want to be the Lehman Brothers of the EU. I’m not demanding loans for Greece at the same favorable conditions that Germany gets, but we need more favorable terms than we’re getting now."
Greece bought time yesterday by selling 10-year bonds with investors bidding for more than three times the 5 billion euros it sought to raise. The goal was to avoid a repeat of a five- year note sale in January, when the debt tumbled on the first day of trading. Greece faces more than 20 billion euros in debt redemptions in April and May.

Wage Cuts

"Now it’s really playing for time," said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission.
Tax increases and pay cuts for government employees outlined on March 3 were designed to guarantee Greece would meet a January pledge to trim the deficit to 8.7 percent of gross domestic product from 12.7 percent, more than four times the euro region’s 3 percent limit.
Concern that Europe will fail to cope with Greece’s fiscal woes has knocked the euro down 5.4 percent against the dollar this year. Trichet’s opposition to the IMF as a safety valve further undercut the currency yesterday. It fell more than 1 cent to $1.3560.
"Europe is being short-sighted," said Ted Truman, a senior fellow at the Peterson Institute for International Economics and a former adviser to U.S. Treasury Secretary Timothy F. Geithner. "If Europeans get it wrong then this impacts financial markets. It will likely impact European growth and that of the rest of the world."

Greek Backlash

Yesterday brought mixed messages about Greece’s romance with the IMF. Finance Minister George Papaconstantinou called the IMF a last resort if the European Union fails to "rise to the occasion."
That shifted the focus back to Greece’s efforts to get out of the fiscal jam on its own, a job made harder by protests against austerity steps by a socialist government that came to power in October on promises of higher wages and pensions.
"Grossly unfair" was the verdict of Dimitris Bratis, president of the Greek teaching federation, on NET TV yesterday.
Teachers plan to walk off the job today, along with the main public transport union.
Trichet -- involved in drawing up the Feb. 11 declaration of moral support for Greece -- didn’t rule out European support yesterday, while keeping vague about what the EU would do.
"I gave publicly my support for the statement," Trichet said, reading excerpts aloud at his Frankfurt press conference.
"I take that commitment as very, very important."
German lawmakers briefed on the aid discussions have spoken of contingency plans to offer Greece about 25 billion euros, enough to cover the maturing debt. One option may be for state- owned lenders such as Germany’s KfW Group to buy Greek bonds.
"It has been a game of chicken," said Paul de Grauwe, a professor at the Catholic University of Leuven in Belgium. "The European authorities have not been willing to give clear signals because they are afraid that the Greeks will not go far enough in budgetary tightening. But now I think we can say the Greeks have gone quite far. The euro zone governments should take a step forward now which could create a virtuous circle."