The ECB comedy show continues. Jean-Claude Trichet went ballistic and walked out of a meeting over Jean-Claude Junker's use of the terms re-profiling and "soft restructuring".
Adding to the tenseness, huge infighting is in progress over who will replace Dominique Strauss-Kahn who just resigned as IMF chief. Some suggest outgoing ECB president Jean-Claude Trichet.
IMF Head Strauss-Kahn Resigns, Succession Fight Begins
Bloomberg reports Strauss-Kahn Resignation Kicks Off Succession Fight at IMF
Dominique Strauss-Kahn’s resignation as the 10th leader of the International Monetary Fund kicks off a contest on his successor, as European officials seek to retain the job amid a lack of unity among emerging-market nations.
European officials, who have picked the IMF heads for 65 years under a deal that gives the U.S. the lock on running the World Bank, moved to retain their privilege. Sweden’s finance minister endorsed his French counterpart Christine Lagarde, while Dutch central bank Governor Nout Wellink suggested outgoing European Central Bank President Jean-Claude Trichet.
South Africa and Russia said yesterday the next head of the IFM should come from an emerging economy. Trevor Manuel, head of South Africa’s National Planning Commission, is “highly respected in the world,” Finance Minister Pravin Gordhan said in an interview in Pretoria.
Russian central bank Deputy Chairman Sergei Shvetsov said a developing country should be given the chance to run the IMF to better reflect the role of those economies in global trade. South Korea’s central bank governor made similar remarks before the announcement late yesterday that Strauss-Kahn would resign.
Trichet Goes Ballistic Over Junker's Reprofiling Suggestion
Euro Intelligence reports ECB goes ballistic on reprofiling
The confusing debate about “reprofiling” or soft restructuring pays testimony to the sheer incompetence of eurozone’s finance ministers, who are now effectively talking Greece into a damaging, and most likely contagious default. The FT reports that Jean-Claude Trichet walked out of a recent meeting chaired by Jean-Claude Juncker in protest at Juncker’s proposals to reprofile Greek debt.
FT Deutschland reports this morning that Trichet told finance ministers on Monday night that the ECB would respond to a reprofiling by refusing to buy any new Greek debt instruments (meaning it will not be part of any voluntary arrangement in respect of its own Greek debt portfolio). Furthermore, the ECB would refuse to supply the Greek banking system with any further liquidity. (This is something we suspected would happen. A reprofiling would be considered by the rating agencies as a default, which would lead to an instant downgrading of all Greek securities, government and banks, to C, which would make them no longer acceptable to the ECB.) This means that the ECB will effectively boycott Juncker’s silly plan. That, in turn, would force Greece to quit the eurozone within days.)
Other ECB executive board members also went nuclear on this issue. Jürgen Stark said a restructuring would destroy the capital of the Greek banking system, and Greek bond would no longer count as acceptable collateral. Lorenzo Bini Smaghi called the term “soft restructuring” an empty slogan.
Trichet the Ostrich
Euro Intelligence thinks Junker's idea is silly. I disagree. The terms reprofile and "soft restructuring" are silly, but the idea Greece will default is certainly isn't. Suggesting default is one of the more sensible things Junker has said recently.
Greece is going to default and the longer the ECB and IMF attempt to forestall that event, the worse the situation will become.
For further discussion, please see ECB Ostrich Maneuver; Euro-Zone Comedy Show: Junker Proposed "Re-Profiling" Greek Debt, Now He Wants "Soft Restructuring"; Targeting Short-Selling
Trichet's Poor Sovereign Debt Decision
Trichet made a huge mistake buying sovereign bonds of Greece. The idea was to "show support" for the bonds and suppress yields. The strategy worked for about a week. Now the ECB is stuck with a pile of garbage and the yield on 10-year Greek bonds is close to 16%.
Former German central bank head Axel Weber warned Trichet about buying sovereign debt but Trichet went ahead anyway. Instead of admitting mistakes, Trichet wants to kick the can down the road one more time. Unfortunately for Trichet, the bond market says "no".
The real fireworks begin as soon as market participants shun Spanish government bonds . That can happen at any time.
Inquiring minds are watching a video with Lakshman Achuthan at the ECRI who says "Global Slowdown to Hit by Summer, Even for U.S."
The world is headed for an economic slowdown, according to the Economic Cycle Research Institute's (ECRI) Long Leading Index of global industrial growth.
"It is not country specific, but imagine if you could add up all the activity in factories around the world and see if it was accelerating or decelerating, that is what this indicator is focused on," says Lakshman Achuthan founder and managing director of the research center. "And it has been telling us very clearly, unambiguously, that we have a peak in global industrial growth this summer."
I commend Achuthan for a good interview and for insisting last year that a double-dip recession was not in the cards.
Many of you know that I got into a spat with the ECRI a while back. The issue was not that on the merits of the ECRI's indicators, but rather their claim the indicators never missed a recession call and never predicted a false recession.
Inquiring minds may wish to consider ECRI's Lakshman Achuthan Still Blowing Smoke
However, the ECRI and I now see things alike.
On Monday May 16 I wrote Huge Cracks in Global Recovery Thesis; Industrial Production Unexpectedly Drops in Germany, France; UK Weaker than Expected
That is consistent with what Achuthan said to Aaron Task yesterday in that Tech Ticker interview.
Mike "Mish" Shedlock
End Bailout Nation: Larry Kudlow
Obama, Your Jimmy Carter is Showing: John Ransom
Housing Claims Drop: Zacks Investment Research
The NATO of East Europe Shuns U.S.: George Friedman
Obama Can't Feel Your Pain at the Pump: Bob Beauprez
Housing Experts Wrong Again: Kathy Fettke
Bankers as Clowns: Mike Shedlock
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