Retiring ECB head urges continued action on debt crisis

The retiring head of European’s central bank has used an interview with a German Sunday newspaper to warn the eurozone’s crisis is “not over”, and to urge the bloc’s political leaders to do what they have said they will do as a matter of urgency.

John-Claude Trichet steps down from being ECB president today, a week after the bloc’s leaders announced a rescue package for beleaguered nations.

This encompassed increasing capitalisation of European banks to bring tier 1 core capital to 9% of assets; boosting the central rescue fund reputedly to about €1trn; and private holders of Greek bonds voluntarily accepting a 50% reduction in their returns, to cut national debt.

Trichet has been the bloc’s top banker for eight years, and steps down at a time of intense crisis for the currency community. It must raise vast amounts of money to stabilise markets in the debt of beleaguered member states, and potentially also support its banks, which face the haircut on their loans to Greece.

The leader of the Institute of International Finance Charles Dallara told another of Germany’s weekend newspapers that most large European banks will accept the cut, relieving some of the pressure on the eurozone’s politicians.

Though China has not helped matters by saying, via its official Xinhua news agency, it will not be “Europe’s saviour” by lending to the zone’s bail-out fund, as leaders such as France’s Nicolas Sarkozy had hoped.

Trichet said: “Rapid and complete implementation of the decisions [made] is now utterly critical.” He is being replaced by Italian Mario Draghi.

When asked if he agreed with views the markets are ‘monsters’, Trichet said he “would no go that far”, but he could see what is meant by those describing the markets in this way.

“Regulators must strengthen the instruments they have for the oversight of rapidly developing technologies, and take care that innovations that financial markets produce serve the real economy, not damage it. What was happening on the markets was only recognised too late and at the moment we are working to correct this.” He said it was the job of central bankers to use their wisdom “to discipline excesses, whether excessive greed or exaggerated fear”.

But Trichet said Europe’s central bank should not hinder banks doing their business. “Banks finance 75% of all economic activity in Europe. We should not treat banks badly, nor ignore them.”

Trichet also faced questioning from the Bild am Sonntag over inflation, which he aimed to quell earlier this year by raising rates, unexpectedly.

This provoked anger among peripheral nations’ politicians, and market practitioners said it would hit the already-struggling indebted countries hardest.

But Trichet believes eurozone inflation would likely be “very low” for at least a decade, with present expectations forecasting around 1.8%. In September it was 3%.

Some fund managers disagree with such predictions, partly because of the centralised bond buyback program that has expanded the central bank’s balance sheet already, and also because the bailout fund is planned to grow from €440bn to near €1trn.

Alessandro Ghidini, manager of Swiss & Global Asset Management’s JB Emerging Markets Inflation Linked Bond fund, said: “There is a lot of money around in the world, which could be inflationary. The very reason it could make sense to protect real yield from inflation is that inflation is unpredictable.

“Commodities still make up a big part of CPI baskets, and their prices are difficult if not impossible to forecast. Since in emerging markets commodities still play a big role, it can make sense to hedge your returns against what it is difficult to predict.”

Bill McQuaker, deputy head of equities at Henderson Global Investors, said: “Inflation is certainly something that has been on our minds and in our portfolios for a while, and for a while we have been worried about the uncertainty surrounding the inflationary outlook, ever since 2009 and the beginning of QE and the radical policy response that started around then.

“On a global scale the evidence is building that there is something to worry about. There are concerns around the world for the inflation picture, though at least the inflation data looks okay. But we need to pay attention to inflation and be alert to the things that are sensitive to inflation pressure.”

François Savary, CIO at Swiss private bank REYL & CIE, said: “Looking six to 24 months out, we will see some inflation. When you look at the numbers of 3% inflation for Europe, or 3.8% for the US, considering we are currently in a low-growth environment, you ask yourself what will inflation be when we have more growth? We see a risk is of having more inflation coming down the road, and it is important to protect assets from that.”


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