Trichet resists call to step up Greek crisis fight as ECB keeps rate at 1%

European stocks plunge for a third day, euro drops to 14-mth low against dollar.

The European Central Bank (ECB) President Jean- Claude Trichet resisted pressure from investors to take new steps to fight the euro area’s spreading fiscal crisis.

Trichet said the ECB's 22-member Governing Council didn't discuss buying government debt today and that Spain and Portugal don't face the same challenges as Greece, which was granted an international bailout last week. Euro-area governments should instead intensify efforts to cut budget deficits, he said.

"We call for decisive actions by governments to achieving a lasting and credible consolidation of public finances," Trichet said at a press conference in Lisbon after the ECB kept its benchmark interest rate at 1 percent, a record low. Spain and Portugal are "not Greece," he said.

European stocks plunged for a third day and the euro dropped to its weakest level in against the dollar in 14 months on investor concern that the Greek crisis will spread across the region. Spain paid the highest yield since 2008 today to sell five-year bonds and Portugal yesterday had its Aa1 rating put on review for downgrade by Moody's Investors Service.

"This crisis isn't only about Greece," said Laurent Bilke, senior economist at Nomura International Plc in London. "If you wait another month, there will be more countries in difficulty, you will need bigger numbers to shock the markets."

Euro slumps
The euro fell as low as $1.2691 today, extending its drop for the year to 11 per cent. The extra yield that investors demand to hold Spanish and Portuguese bonds over bunds rose to the most since the euro was introduced in 1999.

The ECB has already said it will accept all Greek government securities as collateral when lending to banks after Standard & Poor's downgraded the country's debt to junk.

Economists said the ECB could also reverse the withdrawal of emergency lending measures used to fight last year's recession, dilute collateral rules further and even resort to government bond purchases to restore confidence in markets and lower borrowing costs.

While ECB council member Axel Weber yesterday said there's a threat of "grave contagion effects" in the region, he suggested buying bonds would be a step too far.

"Measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term," he said.

‘Force the ECB’s hand’
Trichet "did not explicitly rule out bond buying, rather just replied that it was not discussed today," said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. "This approach can be considered consistent with the ECB's principles. But it risks that the market will still force the ECB's hand before long."

Trichet is trying to convince investors that turmoil in euro-region markets will subside once the Greek government draws on its 110 billion-euro ($140 billion) aid package and implements an austerity plan.

He said council didn't discuss a possible default by a member state and called the level of interest rates "appropriate," indicating he sees no need to change the key rate any time soon.

Europe's fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the U.K. as the risk of contagion grows, Moody's said in a report today. "Each of these countries' banking systems faces different challenges of different magnitudes, but warns that contagion risk could dilute these differences and impose very real, common threats on all of them," the agency said in the report.