The last time Jean-Claude Trichet refused to bow to market pressure, he was forced into a U-turn. This time the stakes may be even higher.
With the euro zone’s sovereign debt crisis now threatening to engulf Spain, its fourth-largest economy, investors are again looking for the President of the European Central Bank to do something to stop it, such as delaying the withdrawal of unlimited liquidity support for banks and significantly ramping up its bond purchases. The risk is that the ECB becomes a bail- out tool for politicians -- damaging its independence -- the very scenario Trichet wanted to avoid when he was pressed into the unprecedented step of buying government debt in May.
“To some extent the ECB is being held hostage by financial markets,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “As the existing measures are unlikely to be sufficient to solve the problems in the periphery, the ECB probably will be forced to increase its programs substantially.”
On May 6, as Greece’s budget crisis was fueling investor concerns about the fiscal health of other euro-area nations, Trichet resisted pressure to employ new measures, saying it was up to governments to lead the way. That lack of action triggered a bond-market selloff, forcing the ECB to tear up its rule book and provoking a split on its Governing Council.
Contagion
Trichet finds himself in a similar position today after the European Union-led rescue package for Ireland failed to convince investors that policy makers have the tools required, or the resolve needed, to contain the crisis, prompting them to dump Irish, Greek, Portuguese, Spanish and Belgian assets.
With the euro zone’s sovereign debt crisis now threatening to engulf Spain, its fourth-largest economy, investors are again looking for the President of the European Central Bank to do something to stop it, such as delaying the withdrawal of unlimited liquidity support for banks and significantly ramping up its bond purchases. The risk is that the ECB becomes a bail- out tool for politicians -- damaging its independence -- the very scenario Trichet wanted to avoid when he was pressed into the unprecedented step of buying government debt in May.
“To some extent the ECB is being held hostage by financial markets,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “As the existing measures are unlikely to be sufficient to solve the problems in the periphery, the ECB probably will be forced to increase its programs substantially.”
On May 6, as Greece’s budget crisis was fueling investor concerns about the fiscal health of other euro-area nations, Trichet resisted pressure to employ new measures, saying it was up to governments to lead the way. That lack of action triggered a bond-market selloff, forcing the ECB to tear up its rule book and provoking a split on its Governing Council.
Contagion
Trichet finds himself in a similar position today after the European Union-led rescue package for Ireland failed to convince investors that policy makers have the tools required, or the resolve needed, to contain the crisis, prompting them to dump Irish, Greek, Portuguese, Spanish and Belgian assets.
No comments:
Post a Comment