MercoPress. South Atlantic News Agency

Default “not an issue” for Greece, says ECB’s Trichet, but are markets convinced

ECB President Jean-Claude Trichet

Greek bonds and banking stocks took a massive hit on Thursday, driving the debt-stricken Euro zone member's borrowing costs to the highest level since Greece adopted the Euro currency.

However, the debt-wracked nation continues to insist it will not avail itself of a safety net held out by the European Union and International Monetary Fund unless it is truly necessary.

“For the time being it is not necessary to activate the aid mechanism,” said Greek government spokesman George Petalotis.

On Thursday, the European Central Bank extended a helping hand to the Euro zone member, announcing that government bonds would be exempt from tougher penalties when banks use risky collateral.

The move increases the incentive for banks to hold Greek bonds. But ECB President Jean-Claude Trichet denied the new rules were designed to help Greece.

“We didn't say that it was for any particular country,” Trichet told a news conference. However, he did address fears of a Greek default, saying: “Taking all the information I have, a default is not an issue for Greece.”

Greek Economy Minister Louka Katseli said there was “no chance at all that Greece will default” and that the markets were testing Athens' ability to finance itself.

Athens has promised to slash its deficit by almost one-third, to 8.7% of GDP this year. But the government is wary of public opinion after austerity measures prompted a slew of riots and strikes across the country in recent months.

On Wednesday, experts from the IMF began a two-week visit to Greece on to offer practical guidance on how Greece should balance its budget. The country's debt drama has cast doubt on the ability of the EU and Euro zone to deal with financial instability among member states.

Germany in particular has insisted that the IMF play a role in any potential bailout. Chancellor Angela Merkel has emphasized that high Greek borrowing costs alone are not a justifiable reason to enact the safety net.