With all eyes on Greece (and Spain and Portugal) Trichet Struggles to Convince Investors of Euro-Area Solidity.

European Central Bank President Jean- Claude Trichet is struggling to convince investors that the euro region shouldn’t be punished for Greece’s budget problems.

As the Greek government tries to control its record deficit and the country’s bonds slide, Trichet yesterday said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year. The euro nevertheless fell more than half a cent against the dollar and Spanish and Portuguese stocks dropped on concern they are in a similar predicament to Greece.

Trichet “did not convince me,” said Stuart Thomson, who helps manage $100 billion at Ignis Asset Management in Glasgow, Scotland. “Where does he think the Greek, Spanish and Portuguese economies will be three years from now? Their austerity measures will weigh on the euro area as a whole.”

Trichet has been forced to fend off questions about the survival of the euro as investors doubt Greece’s ability to cut its deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit. As concern spreads to Spain and Portugal’s rising debt burdens, Trichet will try to stress the need for fiscal prudence without inflaming skepticism that it can be achieved.

“Something has to happen to turn credibility around,” said Paul Mortimer-Lee, head of Market Economics at BNP Paribas in London. “The market’s just saying it’s not believable. It might have to get worse before it gets better.”

Trichet wants the world to think that hearing is believing. Others think that seeing is believing. No doubt, inquiring minds want concrete examples.

This Is Hearing

“We expect and we are confident that the Greek government will take all the decisions that will permit them to reach that goal,” Trichet said. Additional proposals announced by Greece this week to freeze public-sector wages and revamp the pension system “are steps in the right direction,” he said.

This Is Seeing

Greece’s biggest union yesterday approved a second mass strike this month to protest the spending cuts and tax collectors began a 48-hour walkout, illustrating the difficulty Prime Minister George Papandreou faces in implementing his plan.

Which one do you believe?

Portugal CDS Spreads Widen

Don’t worry. An ECB commission says “Intentions Are Good”.

Please consider Portugal 5-Year Sovereign CDS Spreads Hit New Wides

The cost of insuring Portuguese sovereign debt against default using credit derivatives reached a record high Wednesday, after the country sold fewer treasury bills than expected at an auction.

Portugal’s five-year sovereign credit default swap spreads rose to 197 basis points Wednesday afternoon from 165 basis points Wednesday morning, according to data provider CMA DataVision.

Greece’s five-year sovereign CDS spreads also widened significantly Wednesday afternoon, moving back up to 400 basis points, having dropped below 370 basis points at one point Wednesday morning.

The European Commission on Wednesday put Greece under more pressure to slash its deficit, saying the country should have until mid-March to spell out its budget program for the year.

The Commission “basically says that the intentions are good, but all the details are missing–and it implies an apparent skepticism about implementation,” said Erik Nielsen, Goldman Sachs strategist, in a note.

A second strategist said that sovereign CDS markets were illiquid and that this could be contributing to the size of the moves.

I don’t know about you, but I am breathing a huge sigh of relief knowing full well that in spite of mass protests in Greece and widening credit default swaps in Greece and Portugal, that “Intentions Are Good”. After all, we all know “Hearing Is Believing”.

Mike “Mish” Shedlock
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