EU Economy
Trichet may signal July interest rate hike as the Greek crisis remains focus of policymakers
By Finfacts Team
Jun 9, 2011 - 5:51 AM

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President Obama presents America's highest civilian honour, the Medal of Freedom, to Chancellor Angela Merkel at a State dinner on Tuesday, June 07, 2011. The former scientist spent the majority of her years in Communist East Germany.

European Central Bank (ECB) President Jean-Claude Trichet may today signal a planned hike in interest rates in July at the meeting of the governing council in Frankfurt. The Greek debt crisis is likely to dominate the meeting and the regular press conference.

The German government proposed that Greece offer all holders of its sovereign bonds a 7-year extension of maturities as a condition of more financial aid from the EU's rescue fund, Wolfgang Schäuble, finance minister, said in a letter to his European Union colleagues,  the International Monetary Fund and the ECB, which was published on Wednesday.  

The central bank today will keep its benchmark at 1.25% and the ECB will also publish its latest economic forecasts for this year and next.

“Any additional financial support for Greece has to involve a fair burden sharing between taxpayers and private investors and has to help foster the Greek debt sustainability,” Schäuble said in the letter.

The ECB has not yet responded but Jean-Claude Trichet, has said that he would be prepared to accept a scheme in which financial institutions in Europe were asked to maintain their level of outstanding credit to Greece.

Wolfgang Schäuble in the letter asks other Eurozone finance ministers to use their June 20 meeting to give Greece, and possibly the International Monetary Fund, a “clear mandate” to initiate the process of involving owners of Greek sovereign bonds.

Should the Eurozone fail to reach agreement on new payments to Greece by mid-July “we face the real risk of the first unorderly default within the Eurozone,” Schäuble said in the letter.

Text of Letter

Chancellor Angela Merkel won the support of her coalition parties at meetings on Wednesday night on a second bailout for Greece, saying that Germany’s economic future depended on preventing the Eurozone’s first sovereign default.

Merkel and
Schäuble briefed lawmakers after returning from Washington, where President Obama urged them to avoid contagion from the Greek crisis. The issue of forcing private investors to share a “substantial” burden is crucial for German politicians and Greece will be debated in Bundestag today.

“It’s about the future of the currency union, possibly about Europe, and also about Germany’s economy,” Hans Michelbach, the ranking majority Christian Democrat member of the parliament’s Finance Committee, told reporters after the closed-door meeting.
“You always have to consider the end, and that may mean contagion dangers for other countries and domino effects on our banks.”

Greece needs about €90bn in new support up to 2014, Schäuble told lawmakers, according to reports.

“It’s important that to grant more solidarity, we need more certainty that the recipient -- in this case Greece -- is undertaking the right steps,” said Rainer Bruederle, Bundestag leader of the Free Democrats, the junior coalition party.
“There can’t be a blank cheque”

The Financial Times says Schäuble's letter is seen as an attack on the ECB’s cherished political independence, amounting to a proposal that it engage in “monetary financing,” central bank funding of governments, which is banned under EU treaties.

The ECB opposes any debt restructuring that could be declared an effective default by rating agencies.

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