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Shadow ECB Council Council Recommends a Softer Stance on Greek Debt Restructuring

At the meeting of the Shadow ECB Council on 1 June 2011, a two-thirds majority supported a continuation of the policy of gradual tightening on which the European Central Bank seems to have embarked. The other third held that the risks to the economic recovery were such that no further rate increases would be appropriate over the next few months. Only one member supported an immediate rate hike at the next ECB meeting on 9 June. There was a strong consensus that the ECB should extend its non-standard measures beyond the middle of the year. A majority recommended that the ECB soften its opposition regarding a possible soft restructuring of Greek government debt.   
06.06.2011 - 16:05 Uhr Kommentieren

Frankfurt Members’ average inflation forecast for this year rose further to 2.6% from 2.5% a month earlier. In reaction to the strong first quarter, growth forecasts for this year also rose strongly to an average of 2,0%. For next year, inflation is still expected to be below the ECB’s benchmark again of “below but close to two percent”.  Growth is expected to slow down to 1.6% next year.

While not incorporated in the forecasts, yet, the soft business cycle indicators published on the day of the meeting and the day before, notably for the US, led many members of the Shadow Council to become more cautious regarding the medium-term outlook for growth.


Shadow Council macroeconomic forecasts
(Forecast means in %, previous forecasts in brackets)

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Standort erkennen
    20112.6 (2.5)2.0  (1.7)
    20121.8 (1.8)1.6 (1.6)


    Contributors: M. Balmaseda; E. Bartsch; J. Cailloux; J. Callow; M. Diron, J. Henry, G. Horn; J. Krämer, T. Mayer; J.-M. Six

    Assumptions: Most forecaster assumed that the ECB will raise its key policy rate to 1.5 % within three months and  further to 1.75% within the next six months.

    Risks for the recovery versus rising inflation expectations

    A two-third  majority of the 15 members saw a need, based on current information, to continue raising rates over the next few months. These members judged that - in the face of a current inflation rate of 2.8% and inflation expectations at or above 2% - the ECB had to continue gradually raising the key interest rate to a more “normal” level, in order to avoid a further increase of inflation expectations which could feed into still higher inflation. Members of this camp conceded, however, that recent soft international data might lead them to revise down the preferable end-point of the rate-hiking cycle they perceive as necessary.

    The other members put more emphasis on the headwinds for the economy. They regarded as the biggest risks the strong rise in energy and other commodity prices and the intensifying fiscal crisis of the European periphery, together with the fragility of the banking system. These members judge the loss in real purchasing power from higher import prices to be a very significant drag on demand and fear that a restructuring of the Greek debt might cause financial turmoil, which could derail growth.

    One member suggested an immediate rate hike on 9 June. Five more said that it would be appropriate for the ECB to indicate that a rate hike was to be expected in July, arguing in favor of a pace of one rate hike per quarter. Three more members indicated a bias toward higher rates in the next few months. Five members argued that no rate hike would be appropriate in the foreseeable future.

    Non- standard measures of liquidity provision

    There was a strong consensus on the Shadow Council that  the fragile situation of the banking system required the ECB to continue providing very generous liquidity to banks. No member was in favor of returning to the standard pre-crisis procedures for refinancing operations. However, several members argued in favor of limiting the special liquidity assistance to the weakest banks and attaching conditionality to it. Others argued that this would not be feasible in practice.

    There was also majority support for keeping the Security Markets Program open.

    Stance toward a restructuring of Greek debt

    Most members viewed the ECB’s stance regarding a possible voluntary rescheduling of Greek government debt as overly strict. In particular, they viewed the threat as ultimately not credible that the ECB would refuse to accept any restructured debt titles as collateral in its refinancing operations. These members argued that the possibility that a restructuring of debt would become unavoidable could not be excluded and that in this case, the ECB would not be able to refuse to accept Greek bonds as collateral without causing a severe crisis.

    Other members expressed sympathy for the ECB’s stance, arguing that rescheduling of debt could always be avoided if the political will was there and that it carried a huge risk of crisis and contagion.


    Members’ individual votes:

    MemberAffiliationRate recommendationBias
    José AlzolaThe Observatory Groupunchanged 
    Marco AnnunziataGeneral Electric hike 25bp 
    Manuel BalmasedaCEMEXunchangedup
    Elga BartschMorgan Stanley unchanged 
    Andrew BosomworthPimco unchangedup
    Jacques CaillouxRBS unchanged 
    Julian CallowBarclays Capital unchangedup
    Marie DironOxford Economics unchanged 
    Janet HenryHSBCunchangedup
    Gustav HornIMK, Düsseldorfunchanged 
    Jörg KrämerCommerzbank unchangedup
    Thomas MayerDeutsche Bank unchangedup
    Erik Nielsen  unchangedup
    Jean-Michel SixStandard & Poor's unchanged 
    Angel UbideTudor unchangedup


    Frankfurt,   2 June 2011

    Norbert Häring

    Non-voting Chair of the Shadow ECB Council

    Background information

    The ECB Shadow Council was founded in 2002 upon an initiative of Handelsblatt, the German business and financial daily. It is an unofficial panel, independent of the ECB/Eurosystem, and comprising fifteen prominent European economists drawn from academia, financial institutions, consultancies and research institutes.

    The Shadow Council usually convenes by telephone conference on a monthly basis (though in November it holds a physical meeting). Its discussions take place a week before the monthly official ECB Governing Council "policy" meetings, and are intended to formulate an opinion as to what monetary policy decision its members believe that the ECB's Governing Council ought to undertake, both at its forthcoming meeting and also on a three month horizon. Shadow Council members are encouraged to submit their own economic projections for euro area activity and inflation on a monthly basis, which constitutes the panel's forecast consensus as published each month.

    The Shadow Council's discussions and recommendations differ from surveys of economists concerning the outlook for ECB interest rates because the Shadow Council recommendation expresses the majority view of its' members opinion about what the ECB should do, rather than what they forecast it to do (and hence the "normative" views as expressed by Shadow Council members on what they consider the ECB ought to do can and often do differ from what they might say they expect the ECB to do). This "normative perspective can, however, give an early indication of shifts in the balance of opinion in the expert community, as can be seen by comparing the historic recommendations of the Shadow Council against subsequent decisions undertaken by the ECB Governing Council.

    Members of the Shadow Council base their recommendations on the ECB's objectives as defined under the EU Treaty, though Shadow Council members do not necessarily adopt exactly the ECB's specific interpretation of its mandate: most Shadow Council members consider that a medium term inflation objective of two percent with a symmetric tolerance band around it would be clearer, more realistic and more appropriate than the definition adopted by the Governing Council, which defines price stability as an inflation rate of "below, but close to, two percent", in the medium term.



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