REFILE-ECB FOCUS-Trichet shows velvet glove with Portugal move

(Corrects homophone in first paragraph)

* ECB head at height of his powers as term draws to close

* Weakened governments allow ECB to fill power vacuum

* Trichet’s influence carries risks for govts, successor

By Paul Carrel

FRANKFURT, April 8 (Reuters) – Jean-Claude Trichet appears
to have taken a leaf out of Theodore Roosevelt’s book, adopting
the former U.S. president’s mantra to “speak softly and carry a
big stick” by discreetly pushing Portugal to accept European

In a show of behind-the-scenes strength, the European
Central Bank told Portuguese banks to cut their exposure to
government debt, the head of the country’s banking association
(APB) told Reuters. [ID:nLDE736282]

The pressure from the Frankfurt-based ECB led the banks on
Monday to threaten to stop buying government debt if Portugal
did not request a lifeline — an ultimatum which probably tipped
Prime Minister Jose Socrates into seeking European aid.

The episode highlights the crucial role that Trichet, as ECB
president, has taken in responding to the euro zone crisis,
quietly but effectively filling a power vacuum left by
governments’ slow policy response and aided by the ECB’s ability
to act fast and move markets.

On Friday he denied the ECB had pushed Portugal towards a
bailout [ID:LDE73716X], though a day earlier he did admit the
central bank had encouraged Lisbon to request aid.

“He has emerged over a period of several months as an
absolutely pivotal figure in attempting to resolve what looks
like a near irresoluble crisis,” said David Marsh, chairman of
management consultancy SCCO International.

“Trichet has marched into the centre of the crisis
management — by default, because there is nobody else
interested or knowledgeable or forceful enough,” added Marsh,
author of ‘The Euro: The Politics of the New Global Currency’.

For a Breakingviews column on “ECB steps in where euro
governments failed”, click: [ID:nLDE7370KA]

The nature of the way the European project has developed has
empowered the ECB. With monetary but not fiscal union, there is
no pan-European Treasury able to act. Governments, at times
divided over how to handle the crisis, take time to move.

Late last month, European leaders gave themselves until June
to finalise an increase in their temporary bailout facility at a
summit, failing to deliver the broad package they had promised
to resolve their debt crisis. [ID:nLDE72O0YO]

The ECB has enormous fire power, with almost 1.9 trillion
euros in Eurosystem assets — those held by euro zone national
central bank — under its umbrella.

“Until a country is under EFSF/IMF support, the only player
is the ECB,” said Deutsche Bank economist Gilles Moec, referring
to the aid offered by the European Financial Stability Facility
(EFSF) and the International Monetary Fund (IMF).

“The ECB’s decision-making process is very swift and they
can act in a matter of hours, and they’ve got a lot of money.”


This week’s Portugal episode is not the first time the ECB
has helped sway the course of a debt-ravaged euro zone country.
Last year, its behind-the-scenes manoeuvring and sparing use of
its bond buying programme put pressure on Ireland to tap the
European bailout fund.

With the leaders of the euro zone’s big four countries —
Germany, France, Italy and Spain — all weakly positioned at
home, Trichet’s behind-the-scenes leadership is giving the euro
zone some direction at a time of crisis.

But the role he is playing also carries risks. His term
expires at the end of October and he will leave big boots to
fill. He is also an unelected official playing a role in
determining the fate of sovereign countries.

“It’s bad from the point of view of the governance of Europe
because Trichet should be the servant of the governments, not
their master,” said Marsh.

“He’s undoubtedly doing a good job but the question marks
become even more acute when it comes to who will take over from
him, which the governments have to decide in the next few
months, and the position is extremely opaque,” he added.

A Reuters poll of economists in February showed they saw
Italy’s Mario Draghi as the firm favourite to succeed Trichet,
and little has changed since to shift that view. [ID:nLDE71F0RW]

European leaders are expected to make their choice in the
coming months.

“It’s a big job,” said Moec. “It’s about more than just
interest rate setting and monetary policy. The ECB is filling a
lot of voids in Europe. We need people who understand the
political aspects of all this and people who have experience in
dealing with governments, in European institutions.”

Draghi, a former economics professor with top level
experience of government, financial regulation, at the World
Bank and in the private sector, ticks those boxes.

(Editing by John Stonestreet)

REFILE-ECB FOCUS-Trichet shows velvet glove with Portugal move