Central Bank governor Athanasios Orphanides has never been scared to stick his head above the parapet. Now he’s daring to take on the European Central Bank )
OVER THE past two months, Central Bank governor Athanasios Orphanides has become the darling of the foreign financial media, from the Wall Street Journal to the latest article earlier in the week courtesy of the Bloomberg wire service.
“A former Federal Reserve economist who made a name for himself telling his superiors they were wrong is now taking on European Central Bank President Jean-Claude Trichet,” the Bloomberg article begins. “Now, investors and economists are betting Orphanides, 46, is winning the argument as the euro region suffers its worst recession since World War II,” it adds.
Probably a little exaggerated, according to various observers in Cyprus but nevertheless Orphanides is becoming a name to be reckoned with in Europe since joining the board of the European Central Bank (ECB) when Cyprus adopted the single currency in January 2008.
It took just shy of a year for him to make his ECB presence felt in a very public manner when he fired off a volley advocating lower, or even zero interest rates, at a time when the ECB board appeared to be split on whether further interest rate cuts would be possible in 2009.
Most people would wonder what the big deal was about a comment buried in the middle of a speech made at a low-key event in Larnaca, delivered in Greek on a dark December night. But this was the kind of comment that has financial journalists wetting themselves.
It was the first time that an ECB board member had “dared to confront the hegemonic Bundesbank bloc in public”, drooled the Telegraph a couple of days later. “Orphanides has dropped a neutron bomb on their heads,” it added. Other articles described Orphanides as the ‘ringleader’ in an ECB ‘mutiny’.
The Bloomberg article during the week was no less flattering. “Athanasios Orphanides…was the first ECB official to argue in favour of zero interest rates, challenging Trichet’s position that cutting them so low would have ‘drawbacks’ and should be avoided,” said Bloomberg.
It said at least seven members of the ECB’s Governing Council had lined up behind Trichet as they struggled to agree on new tools that would be needed with zero rates. “Still, some have started to warm to the idea…suggesting Orphanides may be securing support,” it added.
Indeed on Thursday, Orphanides was on his way to being vindicated as the ECB, and the Bank of England dropped interest rates to a record low of 1.5 per cent.
In his 17 years at the US Federal Reserve from 1990 until 2007, Orphanides became known for his willingness to disagree with bosses, according to Vincent Reinhart, a former director of monetary affairs at the central bank and himself a target of Orphanides’ criticism.
Reinhardt recalled that when Fed Vice Chairman Donald Kohn asked him to justify his decision to appoint Orphanides as his senior adviser in 2006, he replied: “It shows that I have sufficient self-confidence to be told I am wrong often.”
But others were cautious. “Orphanides is ignoring the enormous political difficulties that the ECB would actually face,” James Nixon, an economist at Societe Generale in London told Bloomberg. “That lack of political acumen may limit his chances of higher office.”
Indeed there are said to be some in Cyprus who admit privately to being a little concerned that Orphanides is swimming with sharks but others have only praise for him and not a little sense of pride that a Cypriot is out there taking on the ‘big boys’.
“It’s recognition for someone capable who is leading the way for a new approach,” said economist Symeon Matsis. “There are others who support him and it’s good to see a Cypriot out there making waves. He is respected and people are listening to him.”
Michalis Florentiadies, the head of economic research at Hellenic Bank said he wouldn’t, as some foreign media had, describe Orphanides as ‘leading an ECB mutiny’ against the established order.
“It’s not a mutiny… yet,” he said. “It’s normal to have such debates but it’s not gotten out of hand yet.” Florentiades that would involve an actual strong disagreement with the way things were being handled rather than just making alternative suggestions, as Orphanides appeared to be doing.
“Trichet is a very consensual guy,” he added. “He wants consensus on ECB decisions and it’s rare to have dissenting opinions.”
In any case Florentiades expects interest rates to come down further by the very nature of the current crisis. “If things get really bad the ECB will consider a rate close to zero. It’s not reached that point yet,” he said.
Florentiades also said that with his Fed credentials, Orphanides was someone useful to have on the ECB. He said he offered a slightly different perspective than Germany and the Netherlands who were the ‘old school’ and influenced by the German Bundesbank.
“Orphanides is kind of a breath of fresh air,” said the banker. However, Florentiades said Cyprus was a small country so how much influence Orphanides could wield was debatable.
“We have 15-16 [ECB] members, and economies the size of France are the heavyweights,” he said. “But people do listen to him [Orphanides]. I think he is contributing to the debate and in this crisis you need all the sides you can get. You cannot be dogmatic,” he said, as long as the Cypriot Central Bank Governor did not go to extremes. “I don’t think that will happen. People do respect what he has to say and he is perfectly within his rights to say it,” he said.
Former Finance Minister Michalis Sarris, who worked closely with Orphanides in the run-up to the euro adoption said: “He has taken a view and it’s a sensible one and is borne out by events.”
Sarris said there was probably a concern in Europe that in moving too fast towards zero interest “once you got there, there was nothing left to do”. However he said there were other options after that, which Orphanides had also outlined.
“He is not speaking on behalf of Cyprus. He is taking the euro zone view. Cyprus is not very important. We are not in the epicentre of what happening. He has been speaking as a European,” said Sarris.
Commenting on the stance Orphanides was taking against the ‘old guard’ and any possible negative implications it might have for him politically, Sarris said; “I don’t think it has done his reputation any harm. It’s been reinforced. He is one of two or three governors people listen to with more attention. For him and for Cyprus it’s a win-win situation,” he said.
As far as the foreign financial media’s ‘love affair’ with the Cypriot governor was concerned, Sarris said it was partly to do with the fact that journalists always liked to highlight a feud.
“But quite a few serious journalists feel the point he [Orphanides] is making is under-represented and they want to show some support,” he said.
