The euro strengthened to a three-week high against sterling and other currencies yesterday as news broke that the president of the European Central Bank (ECB), Jean-Claude Trichet, was hurrying from a meeting of central bankers in Sydney to attend Thursday's EU summit.
The development raised hopes that Mr Trichet might be able to broker a deal and appease market concerns about the viability of the eurozone, where currency, bond and equity markets have been left in turmoil by the "contagion" sweeping through Greece, Spain, Portugal and other highly indebted eurozone member states.
Strictly speaking, such a bailout is illegal under the Maastricht Treaty and the European Stability and Growth Pact, though few doubt that exceptional times could justify exceptional measures, if the alternative is even greater pressure on the weaker members of the eurozone to leave.
Yesterday, credit default swap (CDS) spreads on 10-year Greek government bonds eased, from 428 to 403 basis points, representing a reduction in the cost of insuring such paper against default.
The ECB said Trichet had changed his travel plans purely because of logistics. Even so, the attendance of the EMU central banker at a meeting of heads of government is highly significant.
Meanwhile, the Greek government once again pledged to maintain their austerity programme, promising to increase the retirement age, raise fuel taxes and accelerate reforms. Nonetheless, Greek unions plan a day of action tomorrow in protest at the government's measures.
The Greek prime minister, George Papandreou, told his cabinet that the measures "must go ahead now... with greater speed. Our primary duty now is to save the economy and reduce the debt, aiming to do so through the fairest possible solutions that will protect – as far as that is possible – the weaker and middle classes".
Mr Papandreou says that he wants to lop 4 percentage points off Greece's budget deficit next year. It is currently approaching 13 per cent of GDP, the highest in the EU, and Greece says it will be below the old Maastricht guideline of 3 per cent of GDP by 2012. Greek government bonds have suffered more than most from the uncertainty during the current crisis, with investors demanding about 4 per cent more in yield than from the equivalent German bund, the lowest eurzone risk.
A concerted effort by the EU and the ECB to guarantee Greece's debts may defuse the crisis. Referring to the various austerity programmes now under way, the president of Germany's Bundesbank, Axel Weber, told Reuters TV: "Now actions have to follow words and we are waiting for that."Reuse content