Trichet Fights a War on Two Fronts

Bloomberg
July 7, 2011

European Central Bank President Jean- Claude Trichet is fighting a war on two fronts as he seeks to contain price pressures while the Greek crisis threatens to blow the euro area apart.

The ECB will raise interest rates for a second time this year, increasing the benchmark by 25 basis points to 1.5 percent, when council members meet in Frankfurt today, according to all 55 economist forecasts in a Bloomberg News survey. The central bank may increase borrowing costs further in the fourth quarter, according to a separate survey.

Trichet is at odds with European leaders over how to contain the debt crisis, saying it’s up to nations to plug budget gaps as policy makers fight price gains. While the ECB has supported lenders with unlimited cash, authorities are struggling to restore investor confidence. Portugal was cut to junk by Moody’s Investors Service on July 5 on concern the country will need to follow Greece in seeking more aid.

“Trichet has drawn a line in the sand on Greece and he’s now focusing on the day job,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The ECB has done more than governments have to prop up the euro area and it really is losing patience with political leaders. It’s up to them to fix the problem.”

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