Wednesday, 15 January 2014

Jean-Claude Trichet's "apology" and responsibilities

Yesterday, Jean-Claude Trichet apologized at a European Parliament hearing concerning the role of the “troika” of international lenders (which managed bailouts in Cyprus, Greece, etc), with his response surprising many, as he blamed Member-State governments for the situation the EU is currently facing and basically washing his hands off the subject.

What caused some to wonder about Trichet's behaviour was that he did not admit any mistakes made by the Troika (and in essence the ECB, even when the IMF admitted to have under-estimated the GDP projections) and showed no remorse whatsoever. A prevalent idea is that Trichet did not do much during his stint at the ECB. Yet, he claims that without his actions, Mario Draghi's "whatever it takes" speech wouldn't have mattered much. 

To be fair, he deserves some credit. Trichet was head of the ECB during 2003-2011 and with the crisis beginning to show its teeth in 2009, the following table shows monetary policy actions since 2009 (even though the policy rate fell by more than 125 basis points in 2008 as a response to the sub-prime lending crisis).
As the reader may observe, the ECB's deposit facility rate fell dramatically in 2009, after new evidence on Greece showed that the country was sitting on a huge pile of debt; in fact both the main refinancing operations and the marginal lending facility rate were reduced during the year. This was actually more than most observers believed the ECB would do at the time. The rate remained unchanged during 2010 while, in an irrational change of mind, it was raised during 2011. As you may remember, the Decision to appoint Draghi was taken in June 2011, while the official inauguration date was in November 2011. Now, the only reason I am bothering you with the dates is that both the rate hikes in 2011 occurred while Trichet was heading the ECB. In fact, just 8 days after Draghi took over, the ECB rate was reduced by 25 basis points. 

In addition, have a look at the European Interbank Overnight (EONIA) Rate in 2010 and 2011: as it appears, the interbank cost of lending rose significantly in those two years (and only began to its fall after November 2011), at a time (after the first Greek PSI in late 2010 and just before the second PSI in Autumn 2011) when confidence about the banking sector had reached its nadir, with the whole situation forcing huge losses on periphery banks. During the same time, daily open market operations were reduced by approximately 38% from 775,559 to 483,141, while liquidity based on the Covered bond purchase programme more than doubled from 2010 to November 2011 (albeit in absolute numbers it was much less than the reduction of open market operations).
Yet, Trichet (or the ECB if you prefer) did something else in order to assist the then ailing European economy: bought large amounts of Irish and Greek government bonds as early as 2010, a policy which well continued in 2011. Had there not been the ECB buying bonds the crisis would have evolved much faster and with greater severity, as it has been a combination of both banking and sovereign trouble. Yet for some countries (Spain, Cyprus, Ireland), the former sector was the one which caused the latter to face problems, while for others (Italy, Portugal, Greece) it was mainly the latter which imposed its burden to the former. 

The ECB's reaction was one to "save the sovereigns" and somehow ignore the banks. This was justifiable at some point: the last three countries, of which Greece got the most publicity during the Trichet presidency, would have gone down spectacularly had the ECB not intervened. As for Ireland, the government was "forced" to guarantee the banks to avoid total collapse, thus forcing the ECB to "guarantee" the state. It goes beyond logic to suggest that the ECB did nothing for Ireland (or other countries in the EZ) during the crisis; yet it is equally illogical to suggest that the ECB did everything it could.

Summing up, the idea that Trichet did nothing, as well as the idea that his actions were what the Eurozone needed at the time are both nonsensical. Trichet should have lived up to his role as the ECB President and stand up against the PSI (if he was really against it). In addition, blaming others for their mistakes and not acknowledging that you could have done much more is not a sign of strength. Yet, the same holds for the MEP's: they are free to judge anyone for the outcome of their actions, but they should not forget that they are also liable for notorious inaction during the crisis. We all know that it's easy to judge in retrospect but it appears to be much easier to do nothing and then judge others about their actions.

P.S. A note to those who suggested that the PSI came back with a vengeance in Cyprus: the "bail-in" is much different from the PSI. In the latter the bank loses capital by experiencing losses in invested funds (in this case government bonds) while in the former it gains capital by effectively seizing deposits. And yes, the latter is better.

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