Trichet and the ECB, Finalizing a Legacy
On October 31, 2011 the tenure of ECB President Trichet will come do an end. In the coming months we will likely hear an increasing drumbeat of noise concerning who will replace Trichet and what policies the new leader of the ECB will embrace. In the meantime, it is likely that Trichet will use the remaining months to tie up loose ends regarding the PIIGS and set a potential course for his successor.
On January 13th, the ECB released its latest statement sending a hawkish tone to the markets and warning that if commodity prices continue to rise the ECB may have to step in a begin raising interest rates in an attempt to stay ahead of the inflationary curve.
During the press conference Trichet reminded the markets that in July of 2008 the ECB was faced with a difficult decision in the face of rising oil prices and not afraid to raise interest rates to maintain price stability..
As Trichet's tenure as head of the ECB draws to a close we are likely to see him begin to tie up some loose ends so as not to burden the new President and allow him to start with a fresh plate.
This explains the recent push by Europe to get Portugal and Spain to accept bailouts. As noted in a fall speech Trichet warned the PIIGS that they cannot wait to get their respective houses in order and that it must be done quickly or else they risk being left behind.
By getting Spain and Portugal out of the way early in 2011, Trichet can turn his full attention to a very pressing matter, rising inflationary pressures.
Italy will become a wildcard if Burlusconi cannot hold onto power. If the Italian government falls then there will likely be pressure by the ECB and the market to accept reforms or a bailout.
December 2010 ECB inflation came in at 2.2%, slightly higher than the 2% upper band. Recent pressures in the agricultural and commodities sectors indicate that inflation may be stubborn and stay above the 2% level for most of 2011. In that case, Trichet may choose to end his term with a rate hike in order to get ahead of the inflation curve and set the course for hi successor.
During the press conference Trichet noted a clear difference between the building inflationary pressures and problems at the sovereign level by remarking that both areas are separate and distinct risks.
Rising commodity prices fuel inflation risk as consumers purchasing power is eroded through higher prices which in turn translates into rising wages.
The problems at the sovereign level fuel sovereign risk as governments are forced to pay higher rates in order to finance new debt and refinance existing debt.
The question yet to be asked is who will replace Trichet as head of the ECB?
The French are concerned as Trichet is the only French member of the council and his departure represents a loss of decision making power over interest rates.
Right now the ECB council is composed of representatives from France (Trichet), Italy, Spain, Germany, Austria, and Portugal. We may see an olive branch extended to France for support of a hawkish candidate by offering them the position currently held by Gertrude Tumpel-Gugerell, the representative from Austria, when she retires in May of 2011.
Late last year the French began to court the head of the Italian Central Bank as a possible successor in contrast to the head of the German Bundesbank who is a leading candidate.
One needs to ask themselves what favors the Germans asked for in return for their bailing out of Ireland and if the recent large purchases of debt by Japan and China were a negotiating ploy.
Whomever takes the reigns of the ECB following Trichet will be watched closely by the market as a hawk would indicate a continuation of the policies and the potential for interest rate increases. A dove would indicate a break with the policies of Trichet and an indication that interest rates are likely to remain low for some time into the future.
Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.
