Trichet set to face heat over Greek bonds

EUROPEAN Central Bank president Jean-Claude Trichet is set to come under fire this week for the bank’s decision to buy Greek bonds.

At the bank’s last meeting he coolly dismissed speculation the ECB was discussing buying Greek bonds – only to reverse the decision a few days later.

The ECB felt it had to step in after noting the huge hike in lending by the Bank of Greece to Greek banks.

He is expected to face a tough grilling over the change of heart this Thursday, at a press conference following the ECB’s monthly policy announcement.

Trichet is also likely to have to dampen speculation of tensions not only between governing council members – Trichet’s likely successor, Axel Weber, openly disagreed with the policy – but also between Eurozone countries. This has impaired the ECB’s credibility and done little to restore market confidence.

BNP Paribas economist Luigi Speranza says that a recipe to regain market confidence should include “a clarification of the details of the European Stabilisation Mechanism and an unconditional commitment from the ECB to support the markets until the SPV (special purpose vehicle) is effectively working”, as well as other reforms and further political commitments.

Market participants have criticised the ECB’s poor communication and demanded greater clarity about the extent and future of the policy.

This week the markets will be looking to see whether the current policy may be extended either financially or geographically, if there will be a limit to the bond purchases and if there will be further refinancing.

RBS’s Jacques Cailloux said at last week’s ECB Shadow Council meeting that the ECB should be prepared to step up its purchase programme in case of further deterioration in the markets.