Analysis:ECB Flags July Hike, Won’t Bend Rules For Greek Deal
FRANKFURT (MNI) – European Central Bank President Jean-Claude
Trichet signaled a rate hike for July but warned markets against drawing
any conclusion about the future rate path of monetary policy.
The central bank also decided to continue its support for the
troubled Eurozone periphery by extending its unlimited liquidity
provision for another quarter despite significantly improved money
market conditions outside Greece, Portugal and Ireland.
Trichet took a tough stance against any form of restructuring of
Greek debt and stressed that the ECB will not bend its rules again.
However, he remained tight-lipped about what the ECB may be ready to
agree to in any possible compromise.
“On balance, risks to the outlook for price stability are on the
upside. Accordingly, strong vigilance is warranted,” Trichet said in his
introductory statement. He later confirmed that he meant, “we are in a
mode where there might be in the next meeting an increase of rates.”
However, Trichet stressed that the ECB is “never pre-committed.”
This is not only true for the next meeting but also for the medium term,
he said. “We are not signaling any particular pace for the next
decisions of our interest rates.”
Coupled with warnings about an “environment of elevated
uncertainty” and new inflation forecasts showing Eurozone HICP well
within the ECB’s price stability limit next year, it seems reasonable to
conclude that Trichet was suggesting the bank will proceed cautiously
with monetary tightening.
While the HICP forecast for 2011 was raised to a midpoint of 2.6%,
from a midpoint of 2.3% seen in March, Trichet said the upward revision
was mainly due to “higher energy and commodity prices.” The projection
for 2012 remained unchanged at 1.7%, comfortably below the bank’s
inflation threshold of close to but below 2%.
Trichet did say that avoiding second round inflation effects in
price and wage setting behavior was “of paramount importance,” and he
warned that “upward pressure is discernible in the early stages of
But the main objective of the ECB’s tightening moves for now
appears to be to exit from negative real interest rates and ensure that
inflation expectations remain anchored after the latest Survey of
Professional Forecasters showed that 50% of those canvassed expected
inflation to run ahead of the bank’s price stability goal.
The signal for a July rate hike may also have been motivated in
part to make a clear statement that the Greece crisis won’t distract the
ECB from its prime mandate of ensuring price stability, even as the
central bank continues to offer its support for troubled countries.
There can be little doubt that the continuation of unlimited
liquidity in all the central bank’s refi operations through 3Q — also
announced today — is geared towards Greece, Ireland and Portugal.
In late May, Executive Board member Lorenzo Bini Smaghi said that
there are now “three countries where all the banking system is dependent
on liquidity. It is very difficult to see how to get out of this and we
are thinking very hard.” In the meantime, the ECB is not pulling the
plug on banks in the EMU periphery.
However, Trichet suggested that the ECB is not prepared to do
anything else to support Greece and that the central bank will stick
firmly to its rules should governments impose private sector involvement
in the next Greek bailout package that risks causing a default.
“We call for avoiding any credit event and a selective default.
That is our position that we have made clear for a period of time,” the
ECB chief said, adding that the central bank excludes “all concepts that
would not be voluntary” or that involve “any element of compulsion.”
Asked whether he could envisage a scenario under which private
creditor involvement would indeed be entirely voluntary, Trichet
appeared to wash the ECB’s hands of the problem. The bank is “not
designing anything,” he said. “It is the responsibility of governments.”
However, he sounded a clear warning to governments that they should
not expect the support of the central bank should they opt for a
solution that triggers a default or partial default. The ECB “will apply
our rules and the framework” as regards the counterparties and the
collateral, Trichet said.
Importantly, he also said that “it is certainly not our intention”
to roll over Greek debt held on the ECB’s balance sheet should there be
an agreement between governments and the private sector to do so.
The ECB is now the largest single holder of Greek government bonds
and its plan not to participate in any such agreement appears to signal
that it does not intend to be the safety valve this time as it has been
throughout most of the financial crisis.
And the ECB will not be bullied into it, Trichet’s suggested in
thinly veiled criticism of the German government.
In a clear hint to German finance minister Wolfgang Schaeuble,
whose letter calling for an extension of Greek debt maturities was
leaked to the media earlier this week, Trichet said that the “ECB has no
dialogue with any particular government.”
“We have a dialogue with the Eurogroup. We are fiercely
independent,” he stressed.
Of course, this reveals little about the nature of any future
bailout program for Greece. As Trichet said, it is up to governments to
decide and it cannot be ruled out that the politicians will ignore the
With the tough ECB talk, however, it appears increasingly likely
that any restructuring would indeed turn into a disaster for Greece.
— Frankfurt bureau: +49 69 720 142; email: email@example.com —