Eurozone default could trigger Lehmans-style crisis, says Trichet

Crunch week for euro begins with market reaction to European bank stress tests Eurozone governments need to improve their crisis-management skills and learn to speak with one voice, the head of the European Central Bank said on Sunday at the start of what promises to be a crunch week for the single currency. As financial markets deliver their verdict on the results of controversial stress tests on European banks and political leaders prepare for a crunch summit to discuss the single currency crisis on Thursday, the ECB president, Jean-Claude Trichet, said governments needed to improve “verbal discipline”. “There is an absolute need to improve ‘verbal discipline’. The governments need to speak with one voice on such complex and sensitive issues as the crisis,” Trichet said. In an interview with Financial Times Deutschland conducted last week, he reiterated that the ECB would not accept bonds from a nation that defaults as collateral for fear of triggering a “Lehmans-style” event in the financial system. “If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country,” he said. “Because … this would impair our ability to be an anchor of confidence and stability. “The governments would then have to step in themselves to put things right … the governments would have to take care the euro system is presented with collateral that it could accept.” But he did not elaborate on how governments could secure liquidity in case of default. In what Trichet might regard as a lack of verbal discipline, the Irish deputy prime minister said on Sunday that he would like to see the eurozone issue common bonds to soak up the bloc’s debt. “It is an option I favour. It is one of a series of options that have to be looked at,” Eamon Gilmore told Irish state broadcaster RTÉ. Eurozone leaders will meet in Brussels on Thursday to discuss how to halt the threat of contagion to Italy and Spain from Greece’s rumbling debt crisis. Eurozone finance ministers agreed last week to make the European Financial Stability Facility, the eurozone’s multibillion-euro rescue fund, more flexible in order to buy up debt, but details have yet to be worked out and governments, the ECB and the commission in Brussels are at loggerheads as to how to resolve the problem. But Trichet said Europe could surmount its divisions. “The Europeans can manage the issue. It is not a question of technique. It is a question of will and determination.” He said the euro was not in danger and remains “a highly credible currency”. The markets may deliver a more hostile view when European traders react to the stress test results, which were published after markets closed on Friday. Although eight failed the tests and will require a €2.5bn (£2.2bn) capital boost, some analysts said that showed the conditions had not been tough enough. Credit Suisse said: “We previously estimated 10-15 banks as the minimum threshold for credibility. A total recapitalisation requirement of €2.5bn does not effectively test the bailout system .” European debt crisis European banks Europe Euro Currencies Euro European Union Economics European Central Bank Banking guardian.co.uk

Posted by on July 18, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.