Contrary to our (and many others) expectation, Mr. Trichet didn’t use the May ECB meeting to prepare markets for a June rate increase and thus we expect the ECB to keep rates unchanged on Thursday. All ingredients for such a decision were, we thought, in place but the ECB backed down. Immediately after the meeting and press conference, we contemplated about the possible arguments that had convinced the ECB from refrain from warning about a June rate increase. The strength of the euro, the fear of a run away of rate expectations, the marked contrast with the stance of policy adopted by the Fed and BoE and last but not least the risk about the sustainability of debt and growth trajectories of a number of peripheral countries came to mind. A number of apparent inconsistencies in the remarks of Trichet at the press conference and his unusual annoyance at some of the questions asked by journalists puzzled us.
In the weekend, following the ECB meeting, the likely reasons for the ECB decision and Mr. Trichet’s unusual annoyance became clearer, as sources unveiled that a high-level “crisis” meeting took place on Friday evening on the Greek debt problem. All kind of rumours swirled around including the exit of Greece from the euro zone and a debt restructuring. It had become increasingly obvious that Greece wouldn’t be able to tap the markets in 2012/13 and thus a funding gap had opened that needed to be closed. We of course don’t know what exactly was discussed at the secret meeting in early May, but the clumsy communication surrounding that meeting, some denying it while others admitting it, show that undeniably it was a crisis meeting. Various sources indicated that Mr. Trichet simply left the crisis meeting once some participants uttered the possibility of a re-structuring of Greek debt. In such an environment it was logical that the ECB in early May decided not to add to volatility by signalling another rate increase.
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