Trichet’s comments came after the German finance minister argued this week that creditors — who are owed hundreds of billions that Greece cannot afford to pay — must share in losses rather than expecting other governments to bear the entire burden in the form of a bailout.
Trichet also said the central bank will maintain “strong vigilance” against inflation, a signal that the ECB is likely next month to raise interest rates for the second time this year. That would put the ECB further at odds with the U.S. Federal Reserve, which is maintaining its policy of ultra-low interest rates.
Trichet’s comments on the Greek debt crisis come at a sensitive moment when key decisions are being made that will have an impact far beyond the relatively small Greek economy. A three-way game of chicken is underway, with the European economy — and possibly the global economy — in the balance.
Investors have lost faith in Greece’s ability to repay what it has borrowed. As a result, it cannot borrow money to roll over its debts in private markets.
Some European governments, led by Germany, want to shift some of the burden of Greece’s predicament to bondholders who lent the country money. That would mean changing the terms of Greek bonds so they would be paid off further in future. Changing the original terms could put the Greek government in default.
The bondholders — among them many European banks, insurance companies and other large firms — want every penny owed to them and are reluctant to agree voluntarily to accept losses.
And the ECB insists that the terms be upheld unless changes are agreed to by the nation’s creditors. If bondholders were forced to take losses, the ECB could refuse to take Greek debt as collateral in exchange for access to cash, which would be devastating for many European banks.
If no agreement can be reached that satisfies all three sides, the Greek government could default. Not paying back its creditors would mean risking financial devastation akin to that after the bankruptcy of the Wall Street investment bank Lehman Brothers in 2008.
The question now is who will blink.
“We exclude all concepts which would not be purely voluntary, without any elements of compulsion,” Trichet said Thursday. There will be no “credit events,” he said, the term rating agencies use when a debtor misses a payment or otherwise fails to live up to its agreement.
“We are not in favor of restructuring, haircuts and so forth,” Trichet added.
Greece faces huge obligations relative to the size of its economy. Investors are demanding ruinous interest rates of more than 20 percent. And the country has such a famously weak system for collecting taxes that it’s not clear the nation could raise enough revenue to pay down its debt if there were the political will to do so.
And that, too, is in question. There have been large protests in Athens in recent weeks objecting to spending cuts and tax increases already enacted.
Jonathan Loynes, the chief European economist at Capital Economics, said in a research note that it’s unclear whether any agreement on a new bailout and accompanying fiscal trimming can be reached.
“And even if it can,” Loynes said, “it is unlikely to address Greece’s fundamental economic and fiscal problems. As such, we still think a major restructuring of Greek debt lies ahead at some point, whether the ECB likes it or not.”
On Thursday, Trichet left open the possibility that the ECB could support a purely voluntary restructuring of Greek debt — and voluntary is a subjective concept.
Leaders of the central bank have raised one additional possibility in recent days, mentioning the idea of the Greek government selling off assets, such as state-owned companies, to help retire some of its debt.
Trichet cited such an approach in his news conference, suggesting it could raise cash for the government in the near term and make the privatized companies better run in the longer term, making the Greek economy more efficient.