More headaches for Jean-Claude Trichet. Photo credit: World Economic Forum, by Monika Flueckiger

The euro rebounded today with the news that Jean-Claude Trichet, head of the European Central Bank, is expected to leave a meeting of his banking peers early in order to counsel with the European Union leaders. According to The Financial Times, the move is being seen as evidence that a deal to bailout Greece is in the works, with a dip in Greek bonds yields in response.
Of course, the paper adds, any time a financial leader changes his travel plans there are repercussions in the market: “Never mind that it has since emerged Mr Trichet’s travel arrangements were for logistical reasons and that he had accepted in January the invitation to the EU leader gathering; investors remain hopeful that the summit could provide a firebreak to the current sovereign debt firestorm.”

Other observers claim that a Greek bailout is looking increasingly likely: David Wighton, business editor for The Times, wrote today, “For the euro, Greece remains the biggest worry, with attention shifting yesterday to the country’s banking system.” Wighton explained that the “repo” market is all but closed to Greece now, meaning that the alternative is to continue borrowing from the European Central Bank. At some point, something’s got to give: “Some sort of bailout by the rest of the eurozone is looking more likely by the day.”

Meanwhile, the European Investment Bank, the EU’s long-term lending institution, rebuffed speculation that it would be involved in any kind of bailout for Greece, claiming that would go beyond its “legal mandate.” Begging the question, from where exactly would a bailout come? The Financial Times suggested that if Greece looked like it would be unable to refinance its debts, it’s likely other eurozone countries, led by Germany or France, would offer bilateral loans. The paper noted that Paris and Berlin have maintained in public that there could be no bailout of Greece, that the country needs to solve its own problems, but observers claim that there’s only so long this kind of crisis can be allowed to persist.

The Wall Street Journal joined the speculation today, writing that Greece’s problems may need an outside solution and that they may also point to a larger problem with the single currency system as a whole. “[I[f the sovereign-debt worries that are infecting the currency area’s weakest members intensify, and Greece has trouble refinancing its heavy borrowings, European policy makers will have several options to help Greece out of its jam. They are rarely discussed publicly, though, since a bailout would be a grim milestone for the common currency—an admission that European Union budget rules designed to maintain a stable euro are deeply inadequate.”

The Journal suggested three potential solutions: Bilateral loans from other member states; an EU-coordinated bailout; or help from the International Monetary Fund, which has already bailed out three other EU countries, but whose aid comes with a price for the common currency.