The European Central Bank (ECB) signalled yesterday an interest rate hike in July to fight soaring inflation and warned that any policy step that risked a Greek debt default would be "an enormous mistake".
Speaking after the ECB left its main interest rate on hold, president Jean-Claude Trichet said the bank's position on inflation was one of "strong vigilance" a code for tightening monetary policy in the Eurozone.
"The ECB left little doubt that it will hike its key interest rate from 1.25 per cent to 1.50 per cent at its July meeting," IHS Global Insight chief economist Howard Archer said.
In London, the Bank of England left its key interest rate unchanged at a record low of 0.50 per cent.
Besides the stand on rates, the markets were acutely focused on how the ECB would respond to Germany's latest statement on private investors having to pay part of any new bailout for Greece since they are the two most important actors in a drama that could still end in tragedy for the 17-nation Eurozone.
"We would say it's an enormous mistake to embark on decisions that would trigger a credit event," Trichet said, using a market term that denotes an action that would be considered a debt default.
German finance minister Wolfgang Schaeuble has called for private banks to forego collecting Greek public debts for seven years as part of a broader Greek rescue plan, a move ratings agencies warn would constitute a de-facto default.
Trichet and other ECB directors say that forcing private investors to take losses on Greek public debt could completely undermine confidence in the country's financial sector and possibly wreak havoc throughout the Eurozone.
But he reiterated yesterday that the ECB only excluded "concepts which would not be purely voluntary", which left the door open to some sort of compromise rollover agreement with private banks.
The ECB itself did not intend to participate in a voluntary rollover, Trichet noted.
He also warned that the ECB would apply strict rules on the collateral it accepts in exchange for loans which could mean cutting a crucial lifeline to Greek banks in the event of a default.
Though it is unlikely the ECB would risk driving Greek banks under, "the fact that Trichet nevertheless showed himself so resolute demonstrates the ECB's resolve", Commerzbank chief economist Joerg Kraemer said.
"The ECB president has gone on a collision course with the German finance minister."
But "in the end, it will be Eurozone governments and not the ECB that have to decide on any debt restructuring," ING senior economist Carsten Brzeski said. Greece is saddled with €350 billion (Dh1.88 trillion) in debt and markets have concluded a default in some form is inevitable sooner or later.
From / Gulf News