Debt stress in Europe worsening, says Trichet

Euro Zone: Jean-Claude Trichet warns that Europe's debt crisis is now "systemic" and has moved to some of the larger countries.

"Sovereign stress has moved from smaller economies to some of the larger countries," says Jean-Claude Trichet. Reuters

Europe's debt crisis has taken on a systemic dimension, the president of the European Central Bank (ECB) says, in one of the harshest official assessments yet of the continent's financial state.

"Sovereign stress has moved from smaller economies to some of the larger countries," Jean-Claude Trichet told a European Parliament committee yesterday. "The crisis is systemic and must be tackled decisively."

Mr Trichet's comments came as Slovakia's parliament prepared to vote yesterday evening on expanding the powers of the European Financial Stability Facility (EFSF). Slovakia is the last of the 17-member euro zone to act on the issue; all the other countries have approved the measure.

A more powerful EFSF is widely seen as critical to restoring calm in markets and easing concern that Greece and other financially strained countries in the euro zone will default on debt. It is also viewed as an important mechanism to block any spread of the sovereign debt crisis.

"[If] the reforms get passed positive market sentiment is likely to be reinforced by the news," Tim Fox, the chief economist at Emirates NBD, said in a note yesterday.

Stock markets across Europe fell ahead of Slovakia's vote. Germany's DAX index slid 0.7 per cent in afternoon trading, and France's CAC 40 dropped by 1.1 per cent on concern the country's contentious domestic politics could delay passage of the bill.

"The problem in Europe is really one of fundamentally, and maybe as it turns out fatally, flawed economic architecture," said Paul Sheard, the global chief economist at Nomura Securities, a Japanese investment bank.

"They've half-constructed something, but then they were confronted with the financial crisis of 2008 and 2009 and for various reasons that crisis put the global spotlight and the market spotlight on this half-finished job and exposed it."

He agreed with Mr Trichet's assertion that a more decisive approach to the crisis was necessary as European countries drew nearer to fiscal integration. "Markets are ruthless when they sniff the blood of indecisiveness," he said.

The EFSF was created in the middle of last year and authorised to lend up to €440 billion (Dh2.19 trillion) to euro-zone countries in financial distress. The new powers, initially agreed to in July, will allow the fund to buy sovereign bonds to stabilise prices and keep countries' borrowing costs in check and act as a lender of last resort for banks.

Those tasks had previously been carried out by the ECB.

Yesterday, the IMF and EU said Greece was likely to receive a further €8bn in aid early next month as part of a €110bn package after auditors visited the country to ensure it was meeting fiscal targets.

The so-called troika of the IMF, EU and ECB found Greece made "important progress" in whittling down debts that total more than 150 per cent of its GDP. They said the aid would be "most likely" to come early next month once their review of its finances was finalised.

"What needs to be done on our side is to do what we said we will do by the end of October," Evangelos Venizelos, the Greek finance minister, said yesterday, according to a Bloomberg News report.