Wednesday, March 23, 2011

A pending earthquake in Europe?

In the face of the earthquake in Japan, the BoJ acted to inject liquidity into the system. The Fed sounded somewhat dovish on inflationary expectations in its last FOMC statement.

By contrast, I wrote on March 3 that the ECB stated that it expected to rates to start rising as early as April. Since then, many analysts have pooh-poohed that statement by pointing out that the European periphery remains weak and the ECB couldn't possibly raise rates.

Trichet proved the analysts wrong when he stated that he "had nothing to add" to the March 3 statement that rates may rise as early as April, according to this Reuters report:
ECB President Jean-Claude Trichet said he had nothing to add on the bank's monetary policy stance to his comments at its last policy meeting on March 3, when he shocked financial markets by announcing that an April rate rise was possible.

Other European central bankers appeared equally hawkish:
Mario Draghi, who heads the Bank of Italy and is tipped as a possible successor to Trichet, said the ECB "remains prepared to act in a firm and timely way" to ensure inflationary risks do not materialise. Trichet's term as ECB chief expires in October.


In Austria, Executive Board member Gertrude Tumpel-Gugerell said the ECB was exercising "strong vigilance" on inflationary pressures -- repeating the phrase Trichet used on March 3 and which in the past signalled a rate rise was only a month away
Meanwhile, Portugal faces a crisis in April and Mish pointed out that the Portuguese government is on the verge of collapse. When I awoke on March 11 to the news of the devastating earthquake in Japan, what I found equally disturbing for the financial markets was that bond yields in the European periphery were blowing out.
 
If the ECB continues on their hawkish course, it risks destabilizing the financial system in Europe and set off another earthquake with aftershocks that could reverberate around the globe.

1 comment:

Geoff said...

I really enjoy your posts!

I always have to start by stating that I am a complete amateur at investing. However, the whole European debt problem really does not appear to be fixed to me. There are so many things that really look like they will blow-up.

America has it's problems too. Particularly the enormous deficit and future obligations. But at least as the global reserve currency and with a more accommodating policy stance they have more flexibility.

But it is Europe that really needs to get some things sorted out soon.

We do live in interesting times!