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Greek Crisis: Confusion And Paranoia

The major central banks of Europe seem to have reached a stage of confusion and paranoia as the Greek borrowing costs reaches another record high. Jean-Claude Trichet at the ECB doesn’t seem to know what to do, and the German Bundesbank are afraid the Greek government will ask the IMF for more money – money that eventually the Bundesbank will have to come up with.

“I’m not sure whether it’s possible for a human to cope with the tensions in the topics we’re discussing at this stage.”
Silvio Peruzzo

Since February when politicians began squabbling over how to rescue Greece, the euro has lost 4.1 percent against the dollar and the extra yield demanded by investors to hold Greek debt rather than German have increased to a record high 4.68 percentage points. ECB-boss Jean-Claude Trichet, who was supposed to spend his final year in office nurturing the region’s nascent recovery, finds himself powerless to resolve the crisis because he has no control over fiscal policy.
Jean Claude Trichet struggled to answer reporters’ questions at the ECB’s press conference about the interest rates that Greece would have to pay for emergency funds and explain his stance on the IMF’s role in a bailout, Bloomberg reports.
Trichet argued at one point that lending to Greece without a subsidy element could simply mean at rates no lower than those at which creditor countries can finance themselves. He then retreated behind the argument that the decision rests with the governments.
But Trichet also clarified that government bonds would not be affected by the new graduated haircuts system for collaterals, implying that in fact the change will help and not damage Greece.
(Also, interest rates have been left unchanged at 1%.)

“Trichet is essentially an observer in the current crisis,” says Colin Ellis, an economist at Daiwa Capital Markets Europe Ltd. in London and a former Bank of England official. “He does not hold the levers of power.”

“He’s one of the brightest central bankers out there, but it’s getting too complex,”
Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc, says. “He has to fit into a political world and that’s what he’s uncomfortable with.”
“The communication exercise here becomes a monstrous problem,” says Peruzzo.
“I’m not sure whether it’s possible for a human to cope with the tensions in the topics we’re discussing at this stage.”

The Germans Are Getting Paranoid
Frankfurt Rundschau cites from an internal paper, with poisonous attacks on the EU’s backstop agreement for Greece, and in particular against the IMF.
The Bundesbank is afraid of the following scenario. Greece simply calls the IMF for help, and the IMF in turns asks its largest members for money in return for SDRs. As Europe’s largest central bank, the Bundesbank would be immediately called upon to pay up.

The Bundesbank believes that the IMF will offer less conditionality than the EU, and believes that Merkel’s position on Greece is too soft.
The paper also include a more general broadside against the IMF, referring to the Washington-based institution as the Inflation Maximizing Fund, in reference to a recent proposal by Olivier Blanchard, IMF chief economist, to consider a discussion on raising the inflation targets.

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