Trichet Hawkishness to Exacerbate Peripheral Woes

By Marc Chandler

ECB President Trichet is signaling a rate hike and the market debate seems to be between April and May. While the monetary setting may be too easy for Germany, the peripheral countries, where the debt crisis has been concentrated, monetary conditions (currency plus rates) are too tight. Germany 2-year yields are up 20 bp, but periphery yields are up even more, with Portugal, for example, up 32 bp. The ECB’s hawkishness is boosting the odds that Portugal seeks aid by the end of the month. The ECB’s hawkishness is also adding on pressure on European governments collectively to resolve the debt crisis as super easy money from the ECB is coming to an end.

The leaders of what will be the new government in Ireland is arguing the economy is in worse shape than it had been led to believe and it could very well turn out the Ireland needs more funds if it is going to make senior bond holders whole.