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Wednesday December 1, 2010 - 22:28:45 GMT
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Trichet to the Rescue...Peut t’êtres (FXA)

Trichet to the Rescue...Peut t’êtres


When has the ECB circled the wagons and met the enemy of financial destabilization head on?  I can’t think of an example.  The closest to a show of force from the ECB came in early May when Trichet announced over a weekend that the ECB would buy government bonds from struggling periphery EZ members as the Greek debt crisis threatened the euro and EMU.  And even then it followed by a few days the monthly ECB Governing Council meeting where Trichet told the press that there would be no bond purchase program from the ECB.  The reality is the ECB was dragged kicking and screaming into the bond purchase program in a surely embarrassing about face.  And since the bond purchase program went into effect in early May ECB director and Buba President Weber (leading candidate to succeed Trichet in 2012) has called for an end to the program on a number of occasions.   So with the ECB GC set to meet Thursday and the FT reading from the Trichet remarks late Tuesday that the ECB may increase its bond purchase program (last Friday it reached EUR67bln on a settlement basis) dramatically, expectations are elevated for a ECB surprise attack on contagion.  Indeed I have seen and heard some mention the ECB may deploy QE for the first time, buying bonds without sterilizing the operation.  I will eat mon chapeau if this happens.  The ECB is going to put off anything close to quantitative easing as long as possible…when it sees deflation in the whites of the eyes.  I suspect as well there is huge resistance internally to increasing a very unpopular program like foreign bond buying, even sterilized bond buying (commensurate bill sales).  What is left then for the ECB?  A cut in the refi rate?  I will eat my chemise if that happens (there is scope to cut…ECB is not at the zero bound on its key rate).   And the ECB very correctly sees the answer to EZ contagion on the fiscal side…sounds like the Fed non? 


Let’s not forget that expanding the EFSF (bailout fund) is a political decision, and nothing to do with the ECB.  Nor does it have anything to do with the Obama administration which makes me think there is plenty of uniformed people trading lots of dough…thank goodness because if there were indeed perfect information in any market there would be no basis for discretionary trading nor analysts.  US Treasury was not happy with a headline that claimed an unnamed official said the US government would be in favor of increasing its commitment to the IMF if the funds would be used in conjunction with the EU increasing its EFSF.  No time was wasted in denying this report.  But it did expose what is now a major point of contention between the US and Europe (has been since May).  The US thinks the Europeans including finance ministers and central bank never matched the scale of the crisis with their policy response.  Indeed the policy response in the US to the financial crisis including TARP and Fed unconventional measures saved capitalism…European capitalism too.  At the time the US should have done the lion’s share of the policy response in so much as the crisis began in the US and certainly erupted there with the collapse of Lehman.  It follows that with Greece and now Ireland, the Europeans must provide the lion’s share of the policy response and instead responded in May and again November in a woefully underwhelming way.  While the report on the US offering to help enlarge a European bailout fund indirectly through the IMF is probably not in the cards (especially on the day the deficit reduction committee issued its recommendations for cutting the deficit, national debt), there is very real pressure from the US on European officials to step up to the plate and act decisively. 


But that approach to be effective demands a powerful central political institution that is nowhere in Europe and nowhere in the Euro area.  Indeed we are experiencing the current destabilization and contagion in the EZ because of the political need of Germany and to a lesser extent France to force creditors to take haircuts from mid-2013…German voters demand it.  The reality is that despite Irish government guarantees that all Irish government debt and bank debt (senior bank debt) will be made whole, everyone knows this is a promise that can’t be kept short of a complete turnaround in growth outlook (no amount of austerity can service this debt anywhere near current market rates). 


Frankly if Trichet is leading the cavalry to the rescue he is the modern

dayYellow Hair…General George Armstrong Custer.  The answers to this

crisis and the next ones in Portugal and then Spain lie in Brussels and Berlin

not Frankfurt.  There are no solutions Thursday at the ECB meeting, only

more liquidity measures.


David Gilmore


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