Friday, 27 July 2012

Draghi on bumblebees and other financial matters at the Global Investment Conference in London

Here are some lowlights, sorry, highlights, from Mario Draghi's, the president of the ECB, speech yesterday:

  • "The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does". (EcPoFi: it is no mystery than the bumblebee can fly. The euro is not flying and it's no mystery as to why not).

  • "The euro area is much, much stronger than people acknowledge today. Not only if you look over the last 10 years but also if you look at it now, you see that as far as inflation, employment, productivity, the euro area has done either like or better than US or Japan". (EcPoFi: what are the unemployment numbers again in Spain and Greece? Not to mention the US? What about Japan's lost decade that is now approaching two lost decades?)

  • "Then the comparison becomes even more dramatic when we come to deficit and debt. The euro area has much lower deficit, much lower debt than these two countries (viz. the US and Japan)". (EcPoFi: wonder why he picked these two countries as a comparison...)

  • "Progress has been extraordinary in the last six months. If you compare today the euro area member states with six months ago, you will see that the world is entirely different today, and for the better". (EcPoFi: even worse you mean).

  • "But a lot of progress has been done at supranational level. That’s why I always say that the last summit was a real success. The last summit was a real success because for the first time in many years, all the leaders of the 27 countries of Europe, including UK etc., said that the only way out of this present crisis is to have more Europe, not less Europe". (EcPoFi: What was the progress again at the supranational level, please enlighten us).

  • "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough". (EcPoFi: we don't believe you in that it will be enough Draghi, believe you me. But we believe you will shuffle the debt around some more and print some more money).

  • "There are some short-term challenges, to say the least. The short-term challenges in our view relate mostly to the financial fragmentation that has taken place in the euro area. Investors retreated within their national boundaries. The interbank market is not functioning. It is only functioning very little within each country by the way, but it is certainly not functioning across countries. And I think the key strategy point here is that if we want to get out of this crisis, we have to repair this financial fragmentation". (EcPoFi: wrong, you have to set this financial fragmentation free and you should be relieved of your duties. Wrong II, there are more than short-term challenges here).

  • "The second point is in a sense a collective action problem: because national supervisors, looking at the crisis, have asked their banks, the banks under their supervision, to withdraw their activities within national boundaries. And they ring fenced liquidity positions so liquidity can’t flow, even across the same holding group because the financial sector supervisors are saying “no”.
    So even though each one of them may be right, collectively they have been wrong. And this situation will have to be overcome of course". (EcPoFi: if we understand you correctly, maybe they are simply trying to protect their funds?)

  • "And then there is a risk aversion factor. Risk aversion has to do with counterparty risk. Now to the extent that I think my counterparty is going to default, I am not going to lend to this counterparty. But it can be because it is short of funding. And I think we took care of that with the two big LTROs where we injected half a trillion of net liquidity into the euro area banks. We took care of that". (EcPoFi: the markets thinks no, you did not take care of that).

  • "Then you have the counterparty recess related to the perception that my counterparty can fail because of lack of capital. We can do little about that". (EcPoFi: you are absolutely correct Draghi, never forget that).

  • "Then there’s another dimension to this that has to do with the premia that are being charged on sovereign states borrowings. These premia have to, as I said, with default, with liquidity, but they also have to do more and more with convertibility, with the risk of convertibility. Now to the extent that these premia do not have to do with factors inherent to my counterparty - they come into our mandate. They come within our remit". (EcPoFi: how do you calculate the premia not related to counterparty risk? You are tempted to go outside your remit, aren't you).


  • "I think I will stop here; I think my assessment was candid and frank enough". (EcPoFi: we also think our comments were frank enough and we'll also stop there).

Here is the full verbatim (as they refer to it). 

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