Signals to Expect From ECB's Trichet

by Brian Blackstone

Wall Street Journal
July 7, 2011

European Central Bank chief Jean-Claude Trichet's monthly news conference on Thursday could be among the most significant in recent memory: Greece is edging closer to default; Moody's has pushed Portugal into junk status with Greece; euro-zone inflation is near two-year highs; and the economy is slowing.

Oh, and the ECB is almost certain to raise interest rates for the second time in three months, further distancing itself from the U.S. Federal Reserve and Bank of England, which have rates closer to zero and are expected to hold them there for many more months.

Here's a road map for Thursday:

Greece: The ECB initially took a strong stance against debt restructuring or any sort of arrangement with the private sector that leads to default by rating agencies. It forced Germany to back down from its earlier insistence for a maturity extension (which would have almost certainly been ruled a default).

But ECB officials ceded control of the debate when they started speaking favorably about voluntary private-sector participation. The problem is that, ultimately, what constitutes voluntary participation is a judgment call. Governments and banks have touted recent Greek rollover plans as strictly voluntary. Rating agencies are skeptical. Mr. Trichet's remarks will be eyed for whether he thinks private-sector participation is still useful to even be discussing, or whether the very debate is doing more harm than good.

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