By Matthew Brockett and Gabi Thesing
November 3, 2009
SourceNov. 4 (Bloomberg) -- Jean-Claude Trichet is struggling to control Germany’s Axel Weber and fellow European Central Bank council members who are flouting communications etiquette as the bank prepares to exit emergency stimulus measures.
Weber pushed bond yields higher when he breached ECB protocol on Oct. 29 by revealing a possible policy shift on long-term lending to banks, something normally reserved for Trichet. Weber and Belgium’s Guy Quaden also broke a rule that officials refrain from commenting on policy in the week before interest-rate decisions, even though Trichet keeps a list of those who speak out of turn.
The risk is that conflicting remarks muddy the ECB’s message and confuse investors as it moves closer to withdrawing the support that helped prevent a financial meltdown. With no power to rein in errant policy makers on the 22-member Governing Council, Trichet has little option but to use the force of persuasion, a strategy he employed with limited success earlier this year when they clashed over asset purchases.
“The black list is all well and good, but at the end of the day he can’t gag dozens of central bankers around Europe, particularly when they are disagreeing,” said Juergen Michels, chief European economist at Citigroup Inc. in London. “At the same time, you don’t want a cacophony of voices. Markets are so nervous at the moment and some of the reactions to any exit comments are seriously exaggerated.”
Top of the List
Yields on German two-year notes rose as much as 7 basis points to 1.36 percent after Weber signaled the ECB may not renew its 12-month loans to banks next year, one of its key tools for fighting the financial crisis. By yesterday, the yield was back down to 1.26 percent.
Weber’s intervention was the first concrete indication of how the ECB might wean banks off its unlimited supply of cash, and came within a week of tomorrow’s Governing Council meeting and Trichet’s monthly press conference.
That may put Weber at the top of Trichet’s list of officials who break rank during the so-called purdah period, which starts on Thursday morning a week before each rate decision.
The list is drawn up by the ECB’s press division and given to all policy makers when they convene. Other than exposing breaches of protocol and emphasizing Trichet’s call for verbal discipline, the list has no punitive power and some officials are only paying it lip service.
‘I Won’t Say Anything’
Weber, who heads Germany’s Bundesbank, prefaced his Oct. 29 comments on potential exit strategies by saying: “Because we are within a week of the next ECB council meeting, I won’t say anything about current monetary policy.”
Earlier that day, Quaden also cited the one-week communications blackout when he declined to answer reporters’ questions on monetary policy -- before going on to indicate he wasn’t in favor of tightening credit anytime soon.
The ECB and Quaden’s Belgian central bank declined to comment. A Bundesbank spokesman noted Weber said his speech was not about current policy and declined to comment further.
Last month, Weber, Quaden, Austria’s Ewald Nowotny and Nout Wellink of the Netherlands all spoke about monetary policy within a week of the Oct. 8 ECB meeting.
The purdah period and the list were introduced in November 2001 by Trichet’s predecessor, Wim Duisenberg, in an attempt to clean the slate in the week before a policy meeting and show the ECB speaks with one voice.
Shaping the Debate
Some council members break the rule, or float their views before consensus has been reached, when they want to “shape the debate on the Governing Council,” said Julian Callow, chief European economist at Barclays Capital in London. He puts Weber and Luxembourg’s Yves Mersch in this category.
Trichet has faced one of his toughest challenges as ECB president this year as his council split over how to react to the worst recession since World War II. One camp, led by Weber, insisted 1 percent was the lowest limit for the benchmark rate and resisted a push to buy assets. Others such as Athanasios Orphanides of Cyprus argued for a more aggressive approach.
“As a porte-parole of the Governing Council, I think it is important not to create or encourage expectations” about the ECB’s response to the crisis, Trichet said on April 17.
The call for unity fell on deaf ears, confusing investors about the ECB’s intentions. On May 13, Slovenia’s Marko Kranjec said in an interview that the ECB could expand its asset- purchase program, resulting in a half-cent drop in the euro. Earlier that month, bonds rose when Greece’s George Provopoulos said the ECB could cut its key rate below 1 percent.
‘Chronic Struggle’
Weber was eventually forced to accept a plan to buy 60 billion euros ($88 billion) worth of covered bonds, though that was less than half the 125 billion-euro package policy makers initially discussed.
“The fact is these guys have their own constituencies,” said Laurent Bilke, an economist at Nomura International in London. “It is a chronic struggle for the ECB president to get council members singing from the same hymn sheet.”
While tensions died down as the euro-region economy showed signs of emerging from recession, divisions are starting to resurface as the ECB edges toward unwinding its emergency strategies.
Weber, traditionally one of the first council members to warn of inflation risks, said last week that the ECB “won’t wait” for employment to pick up before tightening policy. Quaden, who is more prepared to push policies supporting economic growth, said the same day that the recovery will be “fragile.’ The appropriate policy responses “seem very obvious,” he added.
‘Biased View’
Because the ECB doesn’t publish minutes of policy meetings like the U.S. Federal Reserve, officials’ public comments are the only indication of what they might be discussing behind closed doors, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London.
“The problem is that the comments are shaped by personalities, and these may give a somewhat biased view of the Governing Council debate,” he said.
Trichet will get an opportunity to brief reporters on the ECB’s exit strategy, as well as any disagreements on the council, at a press conference after tomorrow’s rate decision. The benchmark is currently at 1 percent and none of the 56 economists surveyed by Bloomberg News expect a change.
To contact the reporters on this story: Matthew Brockett in Frankfurt at
mbrockett1@bloomberg.net; Gabi Thesing in Frankfurt at
gthesing@bloomberg.netLast Updated: November 3, 2009 19:01 EST