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“Borrow trouble for yourself, if that’s your nature, but don’t lend it to your neighbours.”
                                          Rudyard Kipling

Commentary & Analysis
ECB Kabuki

I watched European Central Bank chief Jean Claude Trichet on Reuters TV yesterday during his press conference; all I could think was Kabuki.

Kabuki, for those not familiar with the term, is defined as classical Japanese dance-drama. The characters are accentuated by elaborate dress and movements in order to enact tragedies and comedies–both tragedy and comedy well define the modern central bank.

Mr. Trichet was in usual good form riding high on his CB horse. Of course it is about credibility and rules, don’t you know? That is, until it’s time to break the rules and still pretend your institution is strictly rules-based, e.g. when the ECB decided it was time to start taking on sovereign country debt, after saying it would not.

The squabble on display during yesterday’s press conference relates to Trichet’s refusal to discuss any path toward a Greek restructuring of debt involving bondholders taking a hit. However, German finance minister Wolfgang Schäeuble insists bond holders must bear some burden; the taxpayers should not continue to be punished by this debacle known as Greek finance, which wasn’t their fault.

I think Mr. Trichet can dress up and dance all he wants, but in the end it is those who are financing this game, the Germans, who will win. So what will that mean?

I will likely mean this is the first step toward a path that should have begun years ago–making those that benefit bear the risks. And bellying up to the bar to admit this experiment in centralization is going very badly, and if there is not a structural change, it will crash–Band Aids cannot keep a flawed structure intact.

Given all the money politicos have thrown down the proverbial rat hole on bailouts, it would have been better employed backstopping the capital of the banks and letting all the dirty laundry come out in the wash–restructuring across the board so that periphery countries could get back to the business of growing their wealth instead of begging for handouts and managing a liquidity crisis.

That said, Mr. Trichet’s point is not without considerable merit. If Greece is allowed a partial restructuring of debt, why will not Ireland and Portugal insist on the same? No reason at all. This could lead to contagion risk. Contagion when ignited spreads like wildfire. It will shed lots of light on the significant exposure on bank balance sheets across the zone, including the ECB’s. This is how a sovereign debt crisis morphs into a banking crisis to boot.

Mr. Trichet has dug in his high horse’s hooves, while Mr. Schäeuble has dug in his wheels on this issue. An open spat for all to see it is.


No matter who wins this one, it may not be good for the price of the euro, i.e. pay now or pay later. But a falling euro in the midst of grinding austerity isn’t a bad thing for the periphery countries or Germany either. Hmmm…

Stay tuned.