ECB - Greece is Convincing
At its monthly press conference, European Central Bank (ECB) President Trichet announced a further gradual reduction of emergency lending facilities. Focus of the meeting was the fiscal austerity package passed by Greece's parliament the previous day. Unlike previous commentaries, Trichet was full of praise for Greece, saying it was "extremely important that the decisions taken by Greece could be convincing because they would credibilize [sic] the adjustment program that was absolutely necessary."
Trichet did not answer whether Greek's actions would sway the ECB to accept Greek debt as collateral in ECB funding operations in case further downgrades technically disqualify them as collateral. However, he did say, "what has been decided [by the Greek government] is very substantial is approved as being convincing by the governing council [of the ECB]."
Trichet built on his recent comments that the eurozone is working as designed, saying, "the European institutions have functioned. There has been the appropriate surveillance of the policy pursued by that particular country according to the requirement by the stability and growth pact; the Commission has done its job. ... I will say this is the functioning of the European institution following the Treaty and each institution in its own role."
Separately, Greece today sold 10-year euro bonds that attracted heavy demand.
While Greece is not out of the woods, we agree with Trichet. In our assessment, Greece is taking necessary steps to regain confidence; those steps are a result of a) market forces threatening to shun Greece from the credit markets and b) European institutions providing a balance of carrots and sticks. This doesn't mean it will be a smooth ride - a crisis, by definition, is not; it also doesn't mean the cost of borrowing for Greece will plummet; finally, it does not mean the rest of Europe will bail out Greece. However, it does mean that a process of normalization can begin where Greece will ultimately be seen for what it is: a struggling country comprising 2% of the eurozone GDP.
Greece will be in charge of its own destiny: hedge funds have not caused Greece's problems; and Germany can't fix Greece's problems, either. After taking very serious austerity measures, Greece may want to consider broadening the tax base - not through more tax increases, but by providing an environment where its citizens are encouraged to work within the system rather than the black market economy. Trust can go a long way, not only in the debt markets, but also in rebuilding an economy.