ECB's Trichet: What? Me, Worry

Jean-Claude Trichet, president of the European Central Bank, an agency with almost no power, said that Greece will not default on its debts. It was as if there is some magic in his words that might help the southern European republic out of what looks more each day like a death spiral.

Trichet told Bloomberg, “A default is not an issue for Greece.” He has faith in the ability of the nations of the euro zone and the IMF to give the Greeks enough financial aid to cover what Petros Christodoulou, director general of the Public Debt Management Agency in Athens, said will be 32 billion euros in debt which the country will need to get it through this year. Earlier this week estimates of the Greek deficit to GDP ratio went from 12.7% to 12.9%. That number may get worse. The Greeks have a habit of underestimating their national expenses and overestimating the willingness of their citizen to pay their taxes.

The big eurozone nations, especially Germany, have lost faith in Greece’s ability to close it budget gap even a little. The most important sign of that is Angela Dorothea Merkel, Chancellor of Germany, has not rushed to Athens to pledge her nation’s aid while embracing Greek Premier George Papandreou in public. After all, Greece only needs 11.6 billion euros this month.

The IMF has made it clear that it intends to play no more than a supporting role in solving the Greek problem. That means that the euro zone nations, particularly France and Germany ,will have to take the lead but instead they have been reluctant.

The yield on Greek two-year notes has gone as high as 9%, about what a corporation in the US with a risky balance sheet would pay on junk bonds. Greece has make no demonstrable effort to improve its budget although Papandreou makes daily promises.

Until Germany make a unequivocal promise to Greece, the situation will continue to devolve into chaos.

Douglas A. McIntyre