Mario Draghi. – My Hero of Financial Market 2013

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It was one and half year ago (to be precise Thursday, July 26, 2012) when European Central Bank (ECB) President, Mario Draghi  vowed to do “whatever it takes” within the central bank’s mandate to preserve the euro. In that speech in London, Draghi confidently added: “And trust me, it will be enough.”. Though it is too early to comment about it, but to me that was the turning point Global Financial problem especially to European Union (EU) problem.

Mario Draghi, an Italian banker and economist who succeeded Jean-Claude Trichet as the President of the European Central Bank (ECB) on 1 November 2011.  Previously , he was the governor of the Bank of Italy. In 2013 Forbes nominated Draghi 9th most powerful person in the world.

The Event

July 26, Mario Draghi, sparked a global financial market and Spanish/Italian bond rally with the assertion that he would do “whatever it takes” to keep the Eurozone intact. The widely accepted interpretation of that assertion is that the ECB will buy more of the sovereign bonds of countries like Italy and Spain, where borrowing costs (interest rates) have risen to unsustainable levels. This action by the ECB was to help reduce interest rates. After that, ECB’s Governing Council voted unanimously to issue a statement, announced by Draghi himself, stating“The euro is irreversible”, & the ECB will will do “whatever it takes to save the euro as a stable currency”.

Result – What it has changed

  • The cost of borrowing, which was at an unsustainable level of 6% plus in Spain & Italy has gradually consolidated at lower levels.  It helped to narrow the funding costs for all the stress country.
  • There have been various encouraging signs in EU country data. Analysts observed that economic recovery, stabilization of  balance of payment and improvement in the budget deficit
  • There has been normalcy in European Union countries like Portugal, Spain, Italy, etc. After the financial crisis and the subsequent recession and the euro currency crisis, Europe was not radar of any investment advisor. Now, smart money has again started moving back.

Return After 26th July 2012

Few Data to show improvement

Parameter

26-Jul-12

31-Dec-13

% Change
Euro/Dollar

1.253

1.374

9.66%

DAX

6582

9589

45.69%

CAC40

3207

4275

33.30%

Futsi*

5573

6749

21.10%

DOW Jones*

12887

16576

28.63%

Italy 10 Year T bill

6.07

3.81

-37.23%

Spain 10 Year T bill

6.9

3.7

-46.38%

UK 10 Year T bill*

1.48

2.84

91.89%

* For Reff
Source  – Marketwatch.com   Data
  • Most of the stock market has come back & given good return. The treasury rate of troublesome countries has come down to realistic levels.

Conclusion

Though, there is still many unsolved problems in the EU such as high unemployment and other structural issues, but we feel that EU zone may finally be on the path to recovery. There are many challenges ahead of Daghi such as Grace debt re-payment, a rising debt level in many euro area countries, un- willingness to reform especially in tax front.

Few Sources

Mario Draghi’s Ongoing Faustian Pact

Add to this the risk of deflation – Greece is the prime example – and the possibility of QE in the context of Draghi’s “whatever it takes” commitment and Greek bond yields end up having a lot more to fall – 10 year Japanese bonds are currently trading

http://www.bloomberg.com/news/2012-07-26/draghi-says-ecb-to-do-whatever-needed-as-yields-threaten-europe.html

http://www.ecb.europa.eu/press/pressconf/2014/html/is140109.en.html

http://www.spiegel.de/international/europe/spiegel-interview-with-ecb-president-mario-draghi-a-941489.html

www.marketwatch.com

A international Market writer & follower, I am really look forward for your suggestion for improvement & feedback. Reader may reach me at bonpriya@gmail.com

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  1. […] Mario Draghi. – My Hero of Financial Market 2013. […]

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