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Thursday, June 23, 2011 8:54 AM


Trichet Admits the Obvious "Risk Signals Are Flashing Red"; Ireland Snubs ECB With Renewed Threat to Bank Bondholders


On rare occasions ECB president Jean-Claude Trichet will admit the obvious. In contrast, you will seldom hear something like this from the Fed: Trichet Says Risk Signals Are Flashing Red as Debt Crisis Threatens Banks

European Central Bank President Jean-Claude Trichet said risk signals for financial stability in the euro area are flashing “red” as the debt crisis threatens to infect banks.

“On a personal basis I would say ‘yes, it is red’,” Trichet said late yesterday in Frankfurt after a meeting of the European Systemic Risk Board, referring to the group’s planned “dashboard” to monitor risks. “The message of the board is that” the link between debt problems and banks “is the most serious threat to financial stability in the European Union.”

Trichet, who chairs the ESRB, made the remarks as European leaders meet in Brussels to discuss how to stave off a Greek default, while preparing a second bailout. The EU is trying to avoid a repeat of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. (LEHMQ) and resulted in European governments setting aside more than $5 trillion to support banks.

While Greek Prime Minister George Papandreou earlier this week won a vote of confidence, bolstering his new government’s chances of pushing through austerity measures to secure further financial aid, European finance ministers said earlier this week they would hold off on approving a 12 billion-euro ($17 billion) payment to the country promised for July until passage of the plans to cut the budget deficit and sell state assets.

“European leaders will try and convince Greeks and financial markets when they meet in Brussels today and tomorrow that they have a workable plan to help Athens avoid a debt default,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. They’ll use a “mixture of arm-twisting and moral support” to force Greece to adopt further reform.
Federal Reserve Chairman Ben S. Bernanke downplayed the risk of a Greek default on U.S. banks, telling reporters yesterday that the impact would be “very small.” With “very few exceptions, the money-market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems,” he said.
Trichet's Game

While honesty is appreciated for honesty's sake, I rather suspect this is simply Trichet's way of warning the Greek parliament to "play ball" exactly as he wants and pass the austerity measures the ECB, IMF, and EU demand.

Thus, Trichet deserves zero credit for his apparent honesty.

Ireland Snubs ECB

Bloomberg reports Ireland Snubs ECB Effort to Avoid Meltdown With Threat to Bank Bondholders
Ireland opened a new front in the drive to restructure debt on the euro area’s periphery, adding to the European Central Bank’s concerns as it tries to head off another wave of financial turmoil.

Irish Finance Minister Michael Noonan said yesterday that senior bondholders should share in the losses of Anglo Irish Bank Corp. and Irish Nationwide Building Society, reversing a policy of protecting owners of senior securities. The ECB is against imposing losses on investors. President Jean-Claude Trichet said on Feb. 7 that haircuts aren’t part of a plan to reduce Ireland’s debt load.

Ireland’s about-face on bondholder involvement in its banking crisis comes as European lawmakers struggle to settle a dispute over how to avoid a Greek sovereign default. While German Finance Minister Wolfgang Schaeuble said last week that Europe’s biggest economy insists on the participation of the private sector, his French counterpart Christine Lagarde has ruled out any action that constitutes a “credit event,” backing the ECB’s view.

“Noonan must be kidding,” said Klaus Baader, an economist at Societe Generale in London
Let's Hope Noonan Not Kidding

We should all hope that Noonan is not kidding. Indeed, Noonan should take advantage of the situation now and ask for 60% haircuts on all senior bonds not just a pissy 3 billion Euros.

Iceland told the EU and IMF where to go. Ireland should do the same.

What will Trichet do? The answer is throw another hissy fit. The correct response to Trichet's hissy fit is to threaten default and threaten to leave the Euro.

Who really has the upper hand here? The answer is Ireland, and Ireland should use it, starting with a nice slap in the face to Trichet, the ECB, the EU, and the IMF.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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