December 5, 2023

News Analysis: E.C.B. May Be Winner in Debt Talks

The E.C.B. lost the battle to prevent European leaders from precipitating a partial default of Greek debt. But, after meeting with Ms. Merkel and other leaders in Brussels Thursday, Mr. Trichet appeared to have won on a more important issue: getting governments to reclaim the task of preventing collapse of the Greek economy, as well as wider responsibility for fiscal performance of the euro area.

“Have they backed down?” Peter Westaway, chief European economist at Nomura International, said of the E.C.B. “To an extent they have.” But in the process, he and other economists said, the central bank extracted concessions that allow it to spend less time saving Greece and concentrate on its day job, overseeing monetary policy.

“The E.C.B. is trying to resist anything that makes it look like monetary authorities are taking on a role that governments should be taking on,” Mr. Westaway said.

Mr. Trichet won commitments from governments in Brussels on another longstanding demand. Political leaders agreed to take more concrete steps to reduce their debt and ensure that the Greek disaster does not repeat itself in some other corner of the euro area. Euro area countries promised to cut their budget deficits to below 3 percent by 2013, in line with limits set by treaty but widely violated.

The European countries also agreed to support Greek banks, another task that has been handled primarily by the E.C.B. And the leaders will do more to help Greece fix its dysfunctional economy.

“The decision of member states and of the commission to mobilize all resources necessary in order to provide exceptional assistance to help Greece in implementing its reforms is very, very important,” Mr. Trichet said in Brussels on Thursday, according to Reuters.

A high-ranking monetary policy official, who could not be quoted by name because of the sensitivity of the matter, said, “We got what we wanted.“

Since the debt crisis began last year, there has been a strong temptation for Ms. Merkel, President Nicolas Sarkozy of France and other leaders to let the E.C.B. do the heavy lifting. Unlike the politicians, Mr. Trichet and his colleagues on the governing council cannot be voted out of office and were able to act more decisively. The E.C.B. also has extensive financial resources and does not need an act of Parliament to deploy them — though it always took pains to avoid any appearance that it was printing money.

But, though Mr. Trichet always framed the E.C.B.’s actions in terms of monetary policy, he faced increasing criticism that the bank had compromised its sacred independence from politics. He was clearly annoyed at political leaders for their lack of stronger action. During a meeting last year, he even got into a shouting match with Mr. Sarkozy, according to several people present.

The package announced in Brussels late Thursday shifts responsibility for a number of key tasks from the E.C.B. to governments. For example, the European Financial Stability Fund will have the power to buy government bonds on open markets to stabilize prices, allowing the central bank to wind down its own highly controversial bond-buying program. The decision in May 2010 by the E.C.B. to begin buying Greek, Portuguese and Irish bonds split the bank’s governing council and has left the bank with billions in distressed debt.

“It is no longer necessary for the E.C.B. to do this job, which is a plus for the E.C.B.,” Jörg Krämer, chief economist at Commerzbank, said in Frankfurt.

European leaders will also guarantee the quality of Greek bonds even if some ratings agencies declare the country to be in partial default. Fitch Ratings said Friday that the plan to extract a contribution from bond investors would in fact constitute a restricted default.

The European Union guarantees mean that the E.C.B. can continue to accept Greek bonds as collateral for short-term loans, maintaining the flow of E.C.B. funds to Greek banks which are shut out of international money markets.

“In our view this is a very important sign of institutional respect from Europe to the E.C.B.,” analysts at Royal Bank of Scotland said in a note Friday.

Analysts cautioned that the rescue plan, outlined in a four-page statement by European leaders Thursday, was short on detail. It is not clear, for example, if the euro area countries are committing enough money to support the Greek banks, Mr. Krämer of Commerzbank said.

He was also skeptical of promises by leaders to do a better job policing each other’s fiscal discipline. “I have heard this for 15 years,” Mr. Krämer said. “I don’t believe it. The E.U. is a consensus driven club. You can’t force other coutnries to do this or that.”

Jens Weidmann, president of the German Bundesbank and a member of the E.C.B. governing council, implicitly greeted the greater willingness by leaders to take more responsibility.

“It is decisive for monetary policy during this sovereign debt crisis that no further risk be transferred to the Eurosystem, and that the separation between monetary and financial policy not be further weakened,” Mr. Weidmann said in a statement, referring to the network of European central banks.

But, in a sign that not all members of the governing council are happy with the agreement, Mr. Weidmann also criticized what he said was a major step toward collective responsibility for the mistakes of individual states.

“This weakens the fundament of a monetary union built on individual fiscal responsibility,” Mr. Weidmann said in a statement. “In the future it will be even more difficult to maintain incentives for solid financial policy.”

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