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The Selloff, Trichet and Monty Python's 'Holy Grail'

Jean-Claude Trichet tried his best to provide reassurance to investors on Thursday.

Jean-Claude Trichet
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Jean-Claude Trichet

“I am not concerned for the Euro system as a whole… if I take the Euro system as a whole we are in a much better situation… than the US and Japan or other big economies," the European Central Bank president said in an interview with CNBC following yesterday’s monthly press conference.

His comments, which followed news that the ECB is again buying debt from Portugal and Ireland but—crucially—neither Spain nor Italy, did little to calm investor nerves and have had me thinking of Monty Python’s "Holy Grail" ever since the transcript hit my inbox yesterday evening.

Fans of Monty Python will know the scene very well. King Arthur, on a quest to find the Holy Grail, has his path blocked by the "Black Knight." Following what is easily the most hilarious sword fight in movie history, Arthur cuts off the arms and legs of the Black Knight, who claims his injuries are “just a flesh wound.”

“All right. We'll call it a draw,” says the Black Knight, now left as not much more than an upright torso, as Arthur rides past on his quest for the Grail.

Trichet’s comments that the wider euro zone system is fine smacks of the Black Knight's refusal to give up the fight when he is without limbs. When Trichet says the wider euro zone is OK, think of, “Come back here and take what's coming to you, I'll bite your legs off,” from the Black Knight.

Make no mistake: Vague assurances that all is well on a macro level in the euro zone do nothing to address the panic setting in across the world at the prospect of an Italian or even Spanish debt crisis.

Some in the market went into yesterday’s ECB meeting hoping for a "shock and awe" response to the crisis and, as they have been in the past, they found themselves disappointed.

“Ultimately a 'shock and awe' response will take place but only after further market deterioration and additional political commitment to tighten fiscal policy and reform economic governance, potentially through another emergency EU Heads of State meeting,” Jacques Cailloux, an economist at RBS, said in a research note following the ECB meeting.

"We believe we are entering the last phase of the crisis, where the amount of stress in the system will rise rapidly from here, ultimately forcing the ECB's hand,” said Cailloux, who predicts crisis and slowdown will paralyze the ECB for the foreseeable future.

Over at Barclays Capital, Julian Callow, an economist with the investment bank, said it would be wrong to blame yesterday’s huge selloff on the ECB, citing a number of other factors, from Asian rate hikes to the slowdown in the US, as contributing to the risk-off trade.

“Overall, to the extent that Thursday’s Governing Council meeting clarified matters, it tended to do so in a way that the market took to reflect the general inadequacy so far of the EU response to the crisis," Callow said.

In Callow's view, Jean-Claude Trichet’s problem is Germany, which believes it can no longer pick up the tab for the rest of the euro zone.

“Germany’s position appears to be that since it comprises 27 percent of euro area GDP, it is not large enough to single-handedly rescue the euro. Rather, Germany is of the view that it must be a collective effort and require all countries under stress to convince the markets that they have credible plans to maintain fiscal solvency,” said Callow .

That has been the problem with attempts to resolve the euro zone debt crisis for more than two years. Any attempt to get ahead of the problem has failed as bandage after bandage has been put over the wound, only for more cuts to appear. Jean-Claude Trichet has been one of those calling for a comprehensive response and has clearly helped shore up confidence after the collapse of Lehman Brothers, but is fighting without any arms or legs until Germany agrees to underwrite the euro zone bond market.

“On the more positive side was the fact that the ECB acknowledged the increased stress in money and bond markets. On the more negative side was the fact that it shied away from addressing the stress in the bond market in a more decisive fashion,” said Anders Møller Lumholtz, an analyst at Danske Bank in Copenhagen, in a note to clients following the ECB meeting.

“This is the first time the ECB has been back in the market since the end of March. But in contrast to last December, when sovereign bonds were bought of countries that were under pressure, this time the ECB steered clear of purchasing Italy and Spain, which are the ones under pressure now," Lumholtz said.

“This is a dangerous game, in our view," he said.

“On balance, the ECB acknowledged that it is back in crisis mode, but in our view bolder steps are required to keep bond and by extension money markets functioning. This means that either the EFSF (European Financial Stability Facility) becomes operational imminently or the ECB needs to bridge the EFSF remit to buy bonds until it can do so, and in the meantime step into the euro area bond markets more decisively," Lumholtz said.

Jean-Claude Trichet is trying, but like the Black Knight left in King Arthur's wake, he will be ignored by his enemies until someone gives him new limbs to fight with.