ANALYSIS:ARE SOVEREIGN bailouts losing their capacity to shock and unsettle? Portugal's capitulation to the inevitable on Wednesday night did not trigger a panic across Europe yesterday. The confirmation that the poorest country in western Europe would join the euro-mendicants club caused financiers and money men barely a raised eyebrow yesterday.
The euro fluctuated less than the day before. Stock markets had an unexceptional day. There was no stampede out of peripheral country bonds: the yield on the Irish 10-year actually fell and – much more importantly – Spanish debt markets were utterly unaffected. Contagion has been contained. For now.
More predictable than yesterday’s market reaction to the latest euro area domino to fall was the announcement by the hawks of Frankfurt that they were hiking interest rates. All 23 members of the ECB’s rate-setting committee backed the quarter-point increase according to the bank’s boss, Jean-Claude Trichet yesterday.
A spike in inflation, caused by soaring commodity prices, has panicked the central bankers, just as happened the last time energy and food prices went skywards in 2008. They got it wrong then, and with no signs that euro zone wages are about to hare after prices, they look like getting it wrong now.
Irish inflation, the lowest among the EU’s 27 member states in February, provides a good example. Yesterday, March inflation figures were released. The headline rate hit 3 per cent. But headlines can deceive. With domestic demand in the Irish economy so weak, the chance of inflation running out of control in the medium term is between minuscule and none. Policymakers elsewhere are more alive to the risks of premature rate rises. In London, British central bankers held their nerve in the face of rising prices – the Bank of England decided to keep rates at their lowest levels since William of Orange established the institution more than 300 years ago.
But the ECB president had more to talk about than price stability at his monthly press conference yesterday. The man described by Minister for Foreign Affairs Eamon Gilmore as a “mere civil servant” pronounced on all manner of things. Trichet admonished governments for their muddled and incomplete response in March to the sovereign debt crisis. The meeting two weeks ago that was supposed to produce a “Grand Bargain” on new rules and arrangements for the euro was not the “quantum leap” he had wanted.
He admitted, too, he had told the Portuguese they needed a bailout. This is akin to a Mafioso making you an offer you can’t refuse, but was hardly surprising – Trichet was the man who decided last November that Ireland couldn’t refuse a rescue package.
The ECB power not being exercised was cause for Irish disappointment. When asked (twice) about the much-hyped possibility of special medium-term financing for Ireland’s basket-case banks, he played down the prospect. He and his colleagues are “reflecting”, he said. After the press conference, Trichet headed for the Hungarian castle town of Gödöllo on the outskirts of Budapest. There he will join Michael Noonan, 26 other EU finance ministers and Olli Rehn, the European Commissioner for economic affairs.
In Habsburg splendour, Noonan will make the case for concessions on the terms of Ireland’s bailout. He faces an uphill task today.
The agendas for the afternoon sessions and lunch are set already. The morning meeting of “eurogroup” ministers, which excludes the 10 non-euro ministers, has no previously agreed agenda items, but it will inevitably be dominated by Portugal.
