Notes From Underground: Trichet, the Lame Duck, Provides Lame Rhetoric to Duck the Serious Issues

It is time for the ECB president to leave the scene as he is losing the credibility that he has labored so hard to construct. Mr. Trichet delivered the widely expected phrase “STRONG VIGILANCE” in his post-ECB monetary policy press conference. The EURO made its high for the day on the utterance of the words “STRONG VIGILANCE” but sold off quickly as Trichet emphasized that the ECB does not signal a guarantee on future interest rates. The guardian of EURO monetary policy desired to keep the markets off-balance.

As traders and investors in the global macro world, it must be remembered that the European elite has great disdain for speculators (those who would try to disrupt the policies of Brussels and Frankfurt by profiteering on betting against the soundness of said policies). Therefore, Trichet can claim that his confusing rhetoric is meant to cause as much pain as possible to those traders in the markets. The ECB is caught in a very difficult situation as it is on the hook for a big credit hit in the event of a credit default of any kind. In Friday’s Financial Times, there is an article by Ralph Atkins and others, which articulates that the current problems in the EU is a result of tensions between the ECB and Germany. As NOTES FROM UNDERGROUND has discussed ad nauseam, Chancellor Merkel proved to be politically inept when she failed to secure the ECB Presidency for Axel Weber.

A strong German at the head of the ECB would have gone a long way toward assuaging the Bavarian Burghers that their economic interests were being protected by a HARD MONEY regime inside the European Central Bank. Merkel’s BONER (take that cub fans) has created great uncertainty as the budgetary problems of the PIIGS continue to plague the credit markets. If Germany and the ECB can’t resolve the issue of who will pay, it will probably result in Mario Draghi not becoming the next ECB president. German intransigence on the private investors taking a hit on any type of  “VOLUNTARY RESCHEDULING” will mean an increase in acrimony between the ECB and German Parliament.

The longer the tension remains, the more difficult the politics in Germany become. It seems the German Constitutional Court is going to hear some of the complaints about the illegality of any bailouts. It seems that the next GCC hearing on the bailout challenge is set for July 5. I advise paying close attention to DER SPIEGEL articles for that seems to be the best forum for those Germans who are most opposed to the present construct of bailouts for the PIIGS. Also, be weary of Trichet’s rhetoric for he is the most political of bankers and will use the media to raise or lower the political temperature. Will Trichet trade future rate increases for a Greek debt relief bargain that provides an escape for the ECB? This question is what we will be entertaining and watching for as the uncertainty of default continues to simmer in the cauldron of EU politics.

Two quick news pieces: It seems as if Secretary Clinton is desirous of becoming the head of the World Bank. This is an auspicious time for this as it would entail the U.S. making a deal with the French in a quid pro quo for supporting Finance Minister Lagarde for the IMF post. Sorry Madam Secretary, but your credentials for this post are even less than for the Secretary of State, and, even more importantly, there would be a conflict because so much of World Bank lending is in areas where President Clinton’s foundation is already involved. The bigger problem, though, is the bargaining that would allow Sarkozy’s minion to gain control of the IMF.

The second key story is that Saudi Arabia was openly rebuffed at the OPEC meeting as the Iranian-led contingent was able to prevent an increase in oil production. The divisions in the Mid-East are being played out in OPEC. With the Iranians having control of the rotating presidency, the Saudis found themselves outmaneuvered. It seems the petroleum markets are going to be very unsettled for quite a while as global politics place a risk premium on oil prices. If the global economy continues to slow, politically induced higher energy prices will act as a further drag on growth. The world’s central banks have much on their plates as we head into summer. Political infighting is the last thing that Bernanke and others need now.

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