Frankfurt, Aug 7 (Newswire): Jean-Claude Trichet, the president of the European Central Bank, has spent much of his career building and defending the euro. But now, in a bitter twist, it looks as if his career may well end with the common currency in shambles.
Mr. Trichet, 68, will retire at the end of October after an eight-year term. Yet markets are crashing, bond investors have turned on Italy and Spain, and it appears certain that when Mr. Trichet returns to civilian life on Nov. 1, the European sovereign debt crisis will be far from resolved.
Indeed, the euro area threatens to become the epicenter of a global financial crisis to rival the one that followed the collapse of Lehman Brothers in September 2008 — a horror sequel that Mr. Trichet himself has said the world cannot bear.
"Our democracies would not be ready to provide once again the financial commitments to avoid a great depression in case of a new crisis of the same nature," he told an audience in Madrid in May.
A lifelong civil servant who wraps his sangfroid and political toughness in French courtliness, Mr. Trichet generally gets high marks for the way he has managed the central bank.
He may be the most influential public official on the Continent, the person who most embodies the dream of a single coin for the European realm.
But recent days have also highlighted what some critics say are policy mistakes by Mr. Trichet, or at least the institution he leads. And just as Alan Greenspan went from being lionized to lacerated after his years at the Federal Reserve were quickly followed by the global financial collapse, these missteps threaten to tarnish Mr. Trichet's legacy.
Mr. Trichet may be remembered "as a charming and talented leader who failed to grasp the gravity of the crisis," said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva.
Some critics, including Professor Wyplosz, say the bank made a fatal error when it began buying Greek, Irish and Portuguese bonds in May 2010, a decision that has left the bank holding more than 74 billion euros worth of questionable debt. Greece should have been allowed to default and restructure under the guidance of the International Monetary Fund, Professor Wyplosz said.
Other analysts say the bank had no choice other than to intervene in dysfunctional markets, but sabotaged its own efforts by moving too hesitantly. The bank should have shown a willingness to buy Spanish and Italian bonds as well, they say.
"What isn't helpful is if you stop halfway," said Frank Engels, co-head of European economics at Barclays Capital in London, who generally holds Mr. Trichet in high regard. "Either you would have abstained entirely, or you would have gone all the way."
The bank's interest-rate policy has also drawn scorn, with critics calling it deeply inconsistent. The bank has raised the benchmark interest rate twice since April to prevent inflation in fast-growing countries like Germany and the Netherlands. At the same time, the central bank has pursued a loose monetary policy in weaker countries like Greece and Ireland by allowing banks there to borrow central bank funds cheaply. On Thursday, amid signs of serious tension in the interbank markets, the central bank expanded the availability of low-cost loans to banks.
"If this is all part of a single objective, then how can you turn one lever toward the right and one to the left?" asked Marie Diron, an economist in London who advises the consulting firm Ernst & Young and previously worked at the central bank.
With European economies slowing and the debt crisis intensifying, critics say, the central bank is making the same mistake this year that it made in July 2008. Then, the bank raised the benchmark interest rate to 4.25 percent from 4 percent even as the financial crisis was gathering force.
After the collapse of Lehman Brothers only two months later, the bank was obliged to throw monetary policy into reverse, lowering the rate to 1 percent by May 2009. It has been at 1.5 percent since July.
To be fair to Mr. Trichet, who declined through a spokeswoman to comment for this article, he has a more limited arsenal of policy tools than Ben S. Bernanke, his counterpart at the Federal Reserve.
The bank charter would not allow it to flood the economy with money the way the Fed has done through its huge purchases of securities.
Some concern abroad about US downgrade
Paris, Aug 7 (Newswire): Europe was taken aback at the unprecedented downgrade of America's sterling sovereign credit rating, as officials of the Group of 7 industrial countries decided whether to hold an emergency conference call to discuss the debt crisis that has beset Europe and the United States.
While officials in both Europe and Asia had girded for such a possibility, the news that Standard & Poor's had lowered Washington's AAA rating to AA+ was nonetheless received with a degree of concern in the corridors of power on the Continent.
The French finance minister, François Baroin, questioned the move, which he said appeared to be based on "nonconsensual figures."
The Obama administration had disputed the judgment, noting that Standard & Poor's had made a significant mathematical mistake and overstated the federal debt by about $2 trillion.
Standard & Poor's said the downgrade was based more on the view that the effectiveness, stability and predictability of American policymaking had eroded during the rancorous debate over lifting the debt ceiling.
Mr. Baroin said he found it curious that neither Moody's nor Fitch, the two other major ratings agencies, had reached a similar conclusion. Moody's has said it was keeping its AAA rating on the nation's debt, but that it might still lower it.
"We have total confidence in the solidity of the American economy," Mr. Baroin said in an interview on French radio. Nonetheless, he added, the decision "confirms" that the world's most developed economies are confronted with the same urgent priorities: to lift growth and reduce public and private debt.
The Australian prime minister also warned against overreacting to the downgrade. Standard & Poor's "had been signaling for some time that unless they saw a certain figure of budget cutbacks out of the discussion that there's been in Washington about the American budget and fiscal consolidation, that they were intending to do that downgrade," Prime Minister Julia Gillard said.
"At the same time, the other two major ratings agencies, Moody's and Fitch, continue to have the American economy rated at AAA. So I think people just need to look at all of the facts."
Japan's reaction was also more muted, according to media reports. Officials in Tokyo said their trust in American Treasuries remained unchanged. In Germany, however, commentators saw the downgrade as further evidence of the decline of American prestige.
The weekly newsmagazine Focus called the downgrade "a public humiliation." The magazine noted a scolding that the United States received from Chinese officials.
"Now the country must allow itself to be reprimanded and lectured before the eyes of the world," Focus said, referring to the United States.
Mr. Trichet, 68, will retire at the end of October after an eight-year term. Yet markets are crashing, bond investors have turned on Italy and Spain, and it appears certain that when Mr. Trichet returns to civilian life on Nov. 1, the European sovereign debt crisis will be far from resolved.
Indeed, the euro area threatens to become the epicenter of a global financial crisis to rival the one that followed the collapse of Lehman Brothers in September 2008 — a horror sequel that Mr. Trichet himself has said the world cannot bear.
"Our democracies would not be ready to provide once again the financial commitments to avoid a great depression in case of a new crisis of the same nature," he told an audience in Madrid in May.
A lifelong civil servant who wraps his sangfroid and political toughness in French courtliness, Mr. Trichet generally gets high marks for the way he has managed the central bank.
He may be the most influential public official on the Continent, the person who most embodies the dream of a single coin for the European realm.
But recent days have also highlighted what some critics say are policy mistakes by Mr. Trichet, or at least the institution he leads. And just as Alan Greenspan went from being lionized to lacerated after his years at the Federal Reserve were quickly followed by the global financial collapse, these missteps threaten to tarnish Mr. Trichet's legacy.
Mr. Trichet may be remembered "as a charming and talented leader who failed to grasp the gravity of the crisis," said Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva.
Some critics, including Professor Wyplosz, say the bank made a fatal error when it began buying Greek, Irish and Portuguese bonds in May 2010, a decision that has left the bank holding more than 74 billion euros worth of questionable debt. Greece should have been allowed to default and restructure under the guidance of the International Monetary Fund, Professor Wyplosz said.
Other analysts say the bank had no choice other than to intervene in dysfunctional markets, but sabotaged its own efforts by moving too hesitantly. The bank should have shown a willingness to buy Spanish and Italian bonds as well, they say.
"What isn't helpful is if you stop halfway," said Frank Engels, co-head of European economics at Barclays Capital in London, who generally holds Mr. Trichet in high regard. "Either you would have abstained entirely, or you would have gone all the way."
The bank's interest-rate policy has also drawn scorn, with critics calling it deeply inconsistent. The bank has raised the benchmark interest rate twice since April to prevent inflation in fast-growing countries like Germany and the Netherlands. At the same time, the central bank has pursued a loose monetary policy in weaker countries like Greece and Ireland by allowing banks there to borrow central bank funds cheaply. On Thursday, amid signs of serious tension in the interbank markets, the central bank expanded the availability of low-cost loans to banks.
"If this is all part of a single objective, then how can you turn one lever toward the right and one to the left?" asked Marie Diron, an economist in London who advises the consulting firm Ernst & Young and previously worked at the central bank.
With European economies slowing and the debt crisis intensifying, critics say, the central bank is making the same mistake this year that it made in July 2008. Then, the bank raised the benchmark interest rate to 4.25 percent from 4 percent even as the financial crisis was gathering force.
After the collapse of Lehman Brothers only two months later, the bank was obliged to throw monetary policy into reverse, lowering the rate to 1 percent by May 2009. It has been at 1.5 percent since July.
To be fair to Mr. Trichet, who declined through a spokeswoman to comment for this article, he has a more limited arsenal of policy tools than Ben S. Bernanke, his counterpart at the Federal Reserve.
The bank charter would not allow it to flood the economy with money the way the Fed has done through its huge purchases of securities.
Some concern abroad about US downgrade
Paris, Aug 7 (Newswire): Europe was taken aback at the unprecedented downgrade of America's sterling sovereign credit rating, as officials of the Group of 7 industrial countries decided whether to hold an emergency conference call to discuss the debt crisis that has beset Europe and the United States.
While officials in both Europe and Asia had girded for such a possibility, the news that Standard & Poor's had lowered Washington's AAA rating to AA+ was nonetheless received with a degree of concern in the corridors of power on the Continent.
The French finance minister, François Baroin, questioned the move, which he said appeared to be based on "nonconsensual figures."
The Obama administration had disputed the judgment, noting that Standard & Poor's had made a significant mathematical mistake and overstated the federal debt by about $2 trillion.
Standard & Poor's said the downgrade was based more on the view that the effectiveness, stability and predictability of American policymaking had eroded during the rancorous debate over lifting the debt ceiling.
Mr. Baroin said he found it curious that neither Moody's nor Fitch, the two other major ratings agencies, had reached a similar conclusion. Moody's has said it was keeping its AAA rating on the nation's debt, but that it might still lower it.
"We have total confidence in the solidity of the American economy," Mr. Baroin said in an interview on French radio. Nonetheless, he added, the decision "confirms" that the world's most developed economies are confronted with the same urgent priorities: to lift growth and reduce public and private debt.
The Australian prime minister also warned against overreacting to the downgrade. Standard & Poor's "had been signaling for some time that unless they saw a certain figure of budget cutbacks out of the discussion that there's been in Washington about the American budget and fiscal consolidation, that they were intending to do that downgrade," Prime Minister Julia Gillard said.
"At the same time, the other two major ratings agencies, Moody's and Fitch, continue to have the American economy rated at AAA. So I think people just need to look at all of the facts."
Japan's reaction was also more muted, according to media reports. Officials in Tokyo said their trust in American Treasuries remained unchanged. In Germany, however, commentators saw the downgrade as further evidence of the decline of American prestige.
The weekly newsmagazine Focus called the downgrade "a public humiliation." The magazine noted a scolding that the United States received from Chinese officials.
"Now the country must allow itself to be reprimanded and lectured before the eyes of the world," Focus said, referring to the United States.
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