So farewell then Jean-Claude Trichet, the 68-year old president of the ECB whose last day in office is today. From tomorrow, the governor of the Italian central bank, Mario Draghi will take over the reins as ECB president at this crucial juncture in the young life of the euro.
The avuncular-looking Jean-Claude has been president of the ECB for exactly eight years since 1st November, 2003 and has been in the role during the inflation of Ireland’s calamitous credit bubble which burst in late 2008; and since then he has been increasingly influencing domestic behaviour – for example, it has been claimed that although Jean-Claude hasn’t explicitly threatened Ireland with a withdrawal of special funding if we burn bondholders, Minister for Finance Michael Noonan understands that “a nod is as good as a wink to a blind horse”. And although the payment on Wednesday this week of the USD 1bn (€714m) Anglo unsecured, unguaranteed senior bond is not mandated by the terms of the Memorandum of Understanding with the IMF/EU/ECB Troika nor is it a term of written agreements with the ECB, it is “understood” that burning the Anglo bondholders would have consequences; and given we rely on the ECB for €150bn of extraordinary funding to our banks (€100bn from the ECB directly and a further €50bn from our own central bank under the ECB’s auspices), it is assumed that Minister Noonan doesn’t want to rock the boat and potentially put that funding at risk – never mind the fact that the ECB can’t just unilaterally withdraw funding to any one country.
Although Unca Jean-Claude might epitomise the ECB position on repaying bondholders in failed Irish banks, he is but one representative; there is evidence that other representatives are more blunt in their position – remember this from June, 2011 – “in the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100 billion into Irish banks. What we are doing is actually illegal, but we have being doing it because we want to help Ireland. Maybe we might come to the conclusion that we should stop” Remember the ECB is directed by an Executive Board of six non-Irish bankers/economists and a Governing Council of 17 national central bank governors including our own Patrick Honohan. Not much is going to change tomorrow.
So what legacy has the career French banker left behind? The fact that respected voices are openly discussing the collapse of the euro and the consequences is not a good sign. And despite the cheering last week, it seems the latest deal on the EuroZone (EZ) crisis is meeting obstacles with potential funding sources not biting our hands off to stuff money into the various EZ funds and bailouts. So Greecestill appears to be teetering on the edge of an unstructured default. Italian bond prices are touching record highs today, ditto Spain. Ireland is still in shock with having to put €60bn (40% of GDP) into its banks. The European bank stress tests are a by-word for farce and a large part of the blame for the dismal reputation and poor financial condition of EZ banks today must be shouldered by the ECB – interbank lending is largely frozen, deposits by banks at the safe-haven ECB are at elevated levels, the EZ banking system is sclerotic. And austerity programmes are causing unrest and collateral unrest from Madrid to Helsinki, Athens to Ballyhea. Before our entry into the euro in 2002, we might have dealt with the current type of crisis by doing what the British are doing and print money to inflate our way out of debt, and to cushion the adjustment of national income to expenditure and to distribute the pain via the drop in living standards across all of society. But Unca Jean-Claude is opposed to so-called Quantitative Easing (QE), so we are left with the blunt instrument of austerity. As regards the setting of interest rates, many still see the decision of the ECB to increase rates in 2007 as wrong and that in 2008/2009 the ECB was too slow to reduce rates.
As for the positives, Unca Jean-Claude will trenchantly defend his actions as being primarily directed at maintaining price stability for the now-330m people in the EuroZone – keeping inflation at around 2% – and he has achieved that. He might also point to the currency maintaining its value against the US dollar and pound sterling, though QE in both theUSandUKwill be in part responsible for that. He has resisted QE in the EZ which might put upward pressure on prices, and he has been a exemplary proponent of the “no bondholder left behind” policy which he would justify on the basis of keeping funding costs for all EZ banks under control. And as for default on any bonds – sovereign or bank – that would be anathema to him unless it was part of an agreed restructuring with bondholders. All in the name of price and cost stability.
So au-revoir then Jean-Claude and ciao Mario! Sadly the change will mean little here.
(Graphic above produced by Japlandic.com, with other examples of artwork available here)