Monday, June 23, 2003
Last Week's Highlights
Markets are obsessively focused on the Federal Reserve's next policy move. The debate rages between the pro-50 basis point cut club and the pro-25 basis point cut club. And if anyone thinks the Fed should not change interest rates, no one can hear them over the cacophony of the debate. Regardless of what the Fed does or doesn't do, the indicators released last week were on the whole positive and equity investors were pleased. All equity indexes followed here were up on the week, despite some profit taking on Thursday. The dollar also was up as traders decided that a 25 basis point decline will do the trick.
ECB presidential succession in place
Bank of France president Claude Trichet was cleared of all wrongdoing in a banking scandal dating back to the early nineties. This removed the major obstacle to his succeeding Wim Duisenberg as president of the European Central Bank. The French government's massive bailout in the early 1990s of Crédit Lyonnais, a formerly state-owned bank, cost the country's taxpayers more than €25 billion. In clearing Trichet, the judge has spared the EU leaders the huge headache of finding an alternative French candidate with anything like Mr. Trichet's high standing in the financial markets.
Five years ago when the ECB was being created, French president Chirac was at odds with the leaders of other European countries over who would run the bank. A compromise was reached under which Wim Duisenberg, a Dutch central banker, would step down half way through his eight-year term of office to make way for Trichet. But Duisenberg had to postpone his retirement after Trichet came under suspicion in the Crédit Lyonnais affair.
His acquittal brought a sigh of relief in the financial markets as well, where Trichet is admired for having improved France's record on inflation. When he took over the treasury in 1987, France had been lax on prices in order to keep the franc weak. Trichet oversaw the change to an anti-inflationary franc fort (strong franc) policy to pave the way for the currency union with the strong, low-inflation deutschemark. In 1993, the Bank of France won independence to set its own interest rates and Trichet became its governor.
European Union leaders officially nominated Trichet as the next president of the ECB at their weekend summit. (Chirac was successful in prying an agreement to back Trichet from the heads of the 15 member states after earlier encountering resistance from current EU president Greece.) The final decision will still have to be cleared by the European Parliament. But Claude Trichet now looks almost certain to take over from current ECB president Wim Duisenberg in October. Under the agreement, the EU leaders will invite their finance ministers to approve Trichet's candidacy.
Trading the Fed
