Sunday, October 30, 2011

NYT: Who is Mario Draghi?

Readers who are interesting in central bank policies, probably want to familiarize themselves with the new ECB President, Mario Draghi.  This role was in theory going to go to fiscal hawk Axl Weber of Germany about a year ago at this time, but Mr. Weber was gently pushed out the door, Paul Volcker style as his policies did not make those who love easy money happy.  So as we say goodbye to Jean Claude Trichet, what is the background and philosophy of the new Italian head of the bank?  (hint: he is a Goldman man!) The New York Times takes an extended look.

  • One European central banker, for instance, predicted that Mr. Draghi would try to curtail a controversial central bank program intended to prop up financially weak nations like Greece, Ireland, Portugal, Spain and Italy — Mr. Draghi’s native country — by buying those nations’ government bonds on the open market.
  • The tactic, which in effect has turned the central bank into the lender of last resort from the Baltic to the Mediterranean, is deeply unpopular here in Germany, the Continent’s economic engine. Many here view the program as tantamount to a taxpayer-funded bailout of nations that should never have been let into the euro club to begin with.
  • But another high-ranking monetary official in Europe predicted just the opposite for Mr. Draghi: that he would be more willing to unleash the full power of the central bank. Both officials spoke on the condition they not be identified to avoid alienating him. Mr. Draghi declined to be interviewed for this article.
  • The question is whether Mr. Draghi, 63, can satisfy his competing constituencies as he confronts a euro-zone crisis that keeps testing the limits of policy-making.   “I can only guess where he will go with monetary policy,” says Carl B. Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y.
  • UNTIL last Thursday, when leaders outlined their latest plan, Mr. Trichet had long argued against a severe reduction in the value of Greece’s bonds. He had maintained that euro-zone economies must pay their debts, even if they are on the verge of insolvency, as Greece is.  
  • Last July, in one of his first big speeches after his appointment had become official, and just before Greece would need a second bailout, Mr. Draghi seemed to break with Mr. Trichet.   “The solvency of sovereign states has ceased to be a foregone conclusion,” Mr. Draghi told bankers in Rome. It is too soon to tell whether he will adopt a more pragmatic, flexible approach at the central bank, which under Mr. Trichet came to be seen as rigid. It is the only major central bank that has not reduced interest rates to near zero.
  • Those closest to Mr. Draghi say his economic views have been shaped by his challenges at the Italian finance ministry in the 1990s, when Italy was expelled from the euro zone’s predecessor, the European Exchange Rate Mechanism and, like Greece today, came close to bankruptcy.
  • His record is not without controversy. In Italy and later, as a vice chairman for Goldman Sachs in Europe, Mr. Draghi was a proponent of nations and other institutions like pension funds using derivatives to more efficiently manage their liabilities. In some cases, many experts now contend, these transactions helped mask the finances of Greece and Italy before those nations were allowed into the euro.
  • People who know Mr. Draghi point to his time at the Massachusetts Institute of Technology in the late 1970s, when economists there emphasized taking a practical approach to solving economic problems, rather than hewing to a particular ideology.   “He is a pragmatist,” says Olivier J. Blanchard, the director of research at the International Monetary Fund who received his economic doctorate from M.I.T. in 1977, a year after Mr. Draghi.
  • Even so, Mr. Draghi is unlikely to challenge the founding dogma of the European Central Bank, which demands that it adhere to its German-inspired mandate to fight inflation. That he has been endorsed by Germany’s political and economic establishment suggests that he will be constrained from taking an unorthodox approach.
  • But central bank watchers worry how Mr. Draghi might be perceived if Italy experiences its own financial crisis — a prospect he himself has not discounted.   “Mr. Draghi knows that he will be in a very exposed position if he is president and the bank has to keep buying more Italian bonds,” says David Marsh, a former journalist at The Financial Times and the author of “The Euro: The Battle for the New Global Currency.”
  • There is a glide and panache to Mr. Draghi, who favors hand-cut black suits and has the assured pace of the basketball player he was in his youth, that set him apart from the general frumpiness of his fellow central bankers.  In Italy, he is known as Super Mario, a moniker he earned in the 1990s when, as the Italian economy neared the brink, he became the acceptable public face of his country to foreign investors. He oversaw one the largest European privatization efforts ever and paved the way for Italy’s entry into the euro.
  • All central bankers must be politically adroit. In Mr. Draghi’s case, his deft touch and, perhaps more important, his essential malleability, are legend.   He has produced a deep treatise on government debt, served as chairman of a world-spanning regulatory body, run Italy’s central bank (while remaining coolly removed from the scandals and fracases of Italian politics) and made a pile of money working at Goldman Sachs — all without being pigeonholed as an academic, regulator or investment banker.
  • People who worked for Mr. Draghi during his 10-year run at the Italian treasury say he applied the M.I.T. approach that put aside models and theories for what actually works.  It was an action-packed 10 years, starting in 1991, with Mr. Draghi representing Italy at the talks that established the framework for the common monetary zone. The fragility of Italy’s application — high levels of debt, runaway deficits — was underscored the next year when Italy was expelled from the exchange rate mechanism and came close to running out of money.
  • But Mr. Draghi’s insistence that countries that delay reforms can go broke shows a departure from Mr. Trichet’s stance. Dating back to the early 1990s, Mr. Draghi has thought deeply about how governments can manage their debt burdens.
  • In one paper he co-wrote in the spring of 2002, just months after he joined Goldman Sachs to lead its effort to win investment banking business from European governments, Mr. Draghi argued that governments might use financial derivatives like interest rate swaps “to stabilize tax revenue and avoid the sudden accumulation of debt.”   The description of how this would work did not obey the letter of the controversial swaps program hatched by Goldman that masked the size of Greece’s debt. But it is faithful to the spirit — namely, that governments as well as pension funds can make use of derivatives to better manage their liabilities.
  • MR. DRAGHI’S Goldman connection has been the one mark on an otherwise spotless résumé and a cause for continued suspicion from some in Europe.   In June, at an appearance before the European Parliament after his appointment, he was asked once more about the Goldman swaps and, in a rare loss of his public cool, cited again his lack of involvement. He said that while at Goldman, he had no interaction with the public sector, despite being hired for that purpose. “I was not in charge of selling stuff to the governments,” Mr. Draghi said. “In fact, I worked in the private sector even though Goldman Sachs expected me to work in the public sector when I was hired.”
  • Those statements came as a surprise to Pascal Canfin, a French member of the Parliament’s economic and monetary affairs committee.   “Are we supposed to believe that he had a discussion with Goldman executives that he cannot have business with sovereign governments even though that was what he was hired to do?” he asked. “It’s very weird. The swaps are not illegal — the question is did he lie before Parliament?”

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