FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet will likely be more cagey than ever about non-standard policy
measures during Thursday’s monthly press conference as political leaders
finally appear ready to step up their fight against the sovereign debt
crisis.
Portugal’s successful bond auction may have relieved some of the
pressure on Lisbon to seek an EU-IMF bailout, but speculation that it
will be the next domino to fall surely has not been dispelled. The ECB’s
plans for further bond market interventions will thus likely be a key
point of interest.
However, Trichet should not be expected to make any commitments
beyond confirming that the bond buy program is ongoing. The ECB will not
take pressure off governments to push ahead with fiscal solutions for
fiscal problems. “Monetary policy cannot substitute for government
irresponsibility,” Trichet said last week.
Trichet’s increasingly harsh tone shows that the central bank’s
patience with political leaders is running out. The ECB’s message may
finally have hit home: Recent public comments and leaks from authorities
suggest that political leaders are preparing to drop their piecemeal
approach to the crisis in favor of a more aggressive and pre-emptive
solution.
“The effective lending capacity of the current European Financial
Stability Facility should be reinforced and the scope of its activity
widened,” EU commissioner for economic and monetary affairs Olli Rehn
said in a contribution to Wednesday’s Financial Times. “Here we need to
review all options for the size and scope of our financial backstops.”
Greek Finance Minister George Papaconstantinou promised Tuesday
that “we are going to be seeing in the next two months major decisions
that will once and for all settle the issue of sustainability of debt in
the Eurozone.”
According to various press reports, those decisions could include
providing aid to Portugal a la Greece and Ireland; increasing EFSF
lending capacity; reducing the interest rates at which the EFSF loans
money; and allowing the EFSF to issue short-term loans and buy up
government bonds; and even issuing joint Eurobonds. German chancellor
Angela Merkel, however, noted Wednesday that EFSF funds are “far from
being exhausted,” suggesting that the scope of these decisions remains
uncertain.
Stronger and more flexible government support tools —
including sovereign debt purchases by the EFSF — could eventually
relieve the ECB off its highly controversial bond buying program. In
this context, decisions by finance ministers and other political
officials might offer a better gauge of ECB policies ahead than
Thursday’s press conference will.
On bank liquidity support — closer to the ECB’s core function —
Trichet is also unlikely to offer much insight into the bank’s plans
beyond the first quarter. The refi schedule for the first three months
of the year is fixed, suggesting that the next announcement will not
come before March.
Journalists will likely press Trichet on potential measures for
addicted banks, since he confirmed late last year that the central bank
is mulling options on that score and data from November showed that
banks in Greece, Ireland, Portugal and Spain still accounted for 64% of
all outstanding ECB loans.
Executive Board member Juergen Stark stressed late last month that
“the solution for the persistent-bidders problem is no precondition for
us to exit from the full allotment,” suggesting that indeed no solution
had yet been found, thus making concrete announcements on the subject
unlikely at Thursday’s press conference.
Stark’s comment also suggests that he — and perhaps some of the
other more hawkish Council members — may want to push ahead with a
return to competitive bidding in three-month operations after 1Q 2011,
even if no further progress on the addicted bank problem has been made
by then.
Meanwhile, inflation in December — at 2.2% — exceeded the ECB’s
price stability target of close to but below 2% for the first time in
over two years. But that will only have reminded Governing Council
members of the risk that excess liquidity and cheap money could
eventually pose to price stability.
For now, Trichet is likely to confirm that while near-term CPI
pressures may exceed previous expectations, the price increases are
mostly driven by energy and food prices and do not materially affect the
medium-term outlook. After issuing new staff forecasts in December, the
Council should leave its introductory statement largely unchanged this
month.
Even if inflation concerns in the Eurotower remain benign for now,
however, the ECB will continue to push for a government solution to the
sovereign debt crisis, allowing the central bank to focus on its core
mandate of price stability.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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