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Tuesday, November 01, 2011

Training Day

Welcome to the Jungle Mr. Draghi.

We think it’s safe to say it’s been a baptism of fire for Mario Draghi during his first day as President of the ECB (not unlike the one in the movie Training Day, although we’ll stop short of any comparisons between his predecessor Jean-Claude Trichet and Denzel Washington).

Not that this wasn’t expected, it was always going to be a difficult time to head up the institution at the centre of the eurozone crisis, but today may have exceeded even the most pessimistic of commentators. A summary of the events which Draghi has had to deal with today (its barely lunchtime as well):
- Greek PM George Papandreou announcing an unexpected referendum and a confidence vote on the latest eurozone summit package. Assessing the potential fallout for the ECB – the fall of the government would probably lead to new negotiations with the troika (of which the ECB is a member) while a ‘no’ in the referendum could mean a Greek default and potentially large losses for the ECB.

- Italian, and to a slightly lesser extent Spanish, borrowing costs rocketing. At pixel time Italian 10yr borrowing costs were up at a record 6.3%, with little sign of ECB intervention to stem the tide. It’s a tough call for Draghi so early on, he clearly does not want to appear to be playing fast and loose with monetary policy, especially not in Germany, but seems genuinely supportive of the bond buying programme as a way to calm markets and stop liquidity problems. So far, the former concern seems to be winning.

- Portugal pushes for “greater flexibility” in its bailout programme (basically asking for more time to implement the fiscal consolidation). Draghi has some time to consider this, with the formal proposal being discussed during the next troika review of Portugal later this month, but it will be tough to balance their insistence on austerity with the fact that Greece has been continually allowed to break the bailout conditions and is now receiving some debt relief.

- On top of these three issues, there are numerous other ones such as the on-going negotiations with the BRICS and the IMF over the investment in the leveraged EFSF and the debate over whether to decrease interest rates at Thursday’s ECB meeting.
As far as first days go, a pretty catastrophic one for Draghi. Unfortunately, we don’t get the feeling that things will be looking up for him anytime soon.


Peripatetic Scribe said...

Slightly off topic but can you please tell me WHO will draft the question to be put forward in a referendum (assuming that the PM survives Friday)? The wording is critical. If it is drafted by parliament then the result is probably a forgone conclusion but if drafted by the Supreme Court (Constitutional Court) then maybe a different result will be seen. Defining the question is an imperative. Oh yes; one terrible thought - perhaps the PM will be told by France/Germany how to phrase the question so "they" get the right answer......hmmmm

Rollo said...

I expect Tricheur is thinking of Draghi in the same way that Blair was thinking of Brown: get out and leave someone else to take the blame for the mess created.