FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet warned governments against risking a Greek default as another
Council member conceded that a larger haircut on Greek debt may no
longer be avoidable.

“The commitments made by Greece and those made by all the European
countries on 21 July should enable the scenario [of a default] to be
avoided, and we have always warned the governments against it,” Trichet
said in an interview with French periodical L’Express on Tuesday.

A re-opening of the July 21 accord to cut Greek bond values by more
than the previously agreed 21% raises risks of a default as it is
unclear whether a purely voluntary agreement that does not trigger
credit default swaps can be reached.

Still, a new deal that includes a more substantial discounting of
the value of Greek debt then previously is in the cards. On Wednesday,
Jens Weidmann joined Ewald Nowotny and Marco Kranjec in warning that a
Greek debt write-down “cannot be ruled out.”

Admissions by Governing Council members — who have long resisted
any private sector involvement — that a larger haircut may be in the
offing is the surest sign that private creditors eventually will have to
bear a larger share of the burden than under current agreement.

Trichet on Tuesday put pressure on governments to ensure that any
new deal must not trigger a default. He warned that the ECB will not
accept any defaulted bonds in its refinancing operations without added
securities — a move that could throttle Greek banks’ funding or be very
costly for European taxpayers.

“We cannot accept the securities of a state in default, even for a
short period of time, as collateral for the refinancing of banks without
an appropriate credit enhancement,” Trichet said. “Our position has not
changed.”

The comments very much mirror those made ahead of the July 21
accord when the central bank was concerned that governments may impose a
private sector participation that could trigger credit default swaps.
At the time, Trichet emphasized that should this happen, governments
will have to provide a solution to keep Greek banks alive.

It remains to be seen whether governments can engineer a deal with
a much larger haircut — talk has been of up to 60% — that not only
enjoys the consent of private creditors but is also viewed as fully
voluntary by rating agencies.

A failure to do so will put governments once again on collision
course with the ECB.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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