Frankfurt : European Central Bank governors meet this week to set monetary policy for the first time since EU leaders agreed to accept potential IMF help for Greece, despite strong objections by the ECB.
An International Monetary Fund operation within the euro zone could be taken as a sign the monetary union cannot sort out its own problems, but might be necessary if Athens cannot get money at reasonable rates on financial markets.
ECB president Jean-Claude Trichet said on March 25 that if the IMF or any other body assumed responsibilities of euro zone central banks or governments, "it's obviously very, very bad".
He sought later to temper his remarks, and will likely be pressed to clarify his position at a press conference after the bank announces its latest interest rate decision on Thursday.
The ECB governing council will undoubtedly leave the main interest rate at a record low of 1.0 per cent, a level hit almost a year ago, as concern over the Greek crisis and high unemployment offset strong industrial output data and a surprise spike in inflation.
"Conventional monetary support will be maintained for much longer than markets expect," while tighter national fiscal policies dampen the outlook for growth, Capital Economics senior European economist Jennifer McKeown said.
Greece's financial crisis, sparked by a public deficit and debt that far exceed European Union limits, has become the euro zone's biggest challenge since the euro was created 11 years ago.
Resulting calls for broader euro zone governance also encroach on the ECB's mandate for monetary policy and have exposed deep fissures in the euro's foundation.
Despite the drama, markets can expect stable monetary conditions even as the ECB dials back exceptionally generous monetary measures, analysts say.
They are more focused on details concerning discounts the ECB could apply to bonds it accepts as collateral for central bank loans, which Trichet is set to unveil at the ECB tower in Frankfurt.
The central bank will maintain a lower threshold for collateral into 2011, Trichet said last week, but probably adopt a sliding scale of "haircuts", or discounts for assets rated below "A minus".
That is good news for Greek banks, which are dependent on ECB loans and offer lower-rated Greek government bonds as collateral.
With economic conditions slowly improving, ECB governors are unwinding unorthodox measures while keeping an eye out for problems, particularly in Greece, Ireland, Italy, Portugal and Spain.
"It seems clear that aggressive fiscal consolidation will do some serious damage to the euro zone's peripheral economies in the coming quarters," McKeown said.
The bank will mull the latest euro zone survey of manufacturing output, which defied market forecasts to hit a 40-month high in March.
At 56.6 points, it was the sixth consecutive month in which the index came in above the 50-point barrier which signals a growth in manufacturing activity.
Euro zone inflation meanwhile jumped to a 15-month high of 1.5 per cent in March, pushing it close to the ECB's target of below but close to two per cent.
Greek debt: Fresh doubts emerge
Greece fought for months to get EU help to tackle its mounting debt crisis but it has taken only days for fresh doubts to emerge on the deal and the country's ability to put its finances in order.
Greece finds it still has to pay a high and rising price to secure crucial funding on the international markets to roll over debt — let alone pay it down so as to relieve the strains on the economy and the broader euro zone.
The March 18-19 accord with the European Union was supposed to convince the markets that Greece would not be allowed to fail and accordingly would be a better credit risk, deserving lower rates of interest on its debt.
As the interest rates or yields fell, Athens would have more money available to pay off its overall debt and reduce a budget deficit which last year was more than four times the EU limit.
Hugely unpopular spending cuts would also help improve the public finances. If that was the plan, however, it has not worked so far.
"The biggest hurdle for the Greek government is to get its borrowing done at a decent yield (interest rate)," GFT analyst David Morrision told AFP. "They (want) ... yields similar to Germany's, around three per cent, rather than the six per cent-plus the market is demanding," Morrision added.
The difference, or spread, between Greek and German 10-year bond yields has steadily widened. "The high spreads reflect the insecurity caused to investors by our country's high debt and credibility deficit," Greek Finance Minister George Papaconstantinou told the Imerisia financial daily on Thursday.
The minister insisted that "the government's aim is to never to have to activate" the EU support mechanism, which analysts have deemed "opaque" and sorely lacking in detail.
