Didier Le Menestrel

In the beginning was the Verb

“Within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” These words pronounced by Mario Draghi last summer marked a major turning point in the life of financial markets in 2012. Whereas, beforehand the euro’s days were numbered, afterwards, the announced disaster was no longer inevitable.

This announcement actually masked the Outright Monetary Transaction (OMT) plan. In a nutshell, this plan stipulated that euro zone countries could request refinancing for unlimited amounts from the European Central Bank. In exchange the ECB would demand guarantees on the budgetary policy implemented in the countries that requested this aid. In a few words, Mario Draghi provided the largest guarantee ever offered to a market. In stockmarket jargon, he had just sold the biggest put option in history.

Central banker’s messages are generally based on a long-winded text in which moderating adverbs, conditional tenses and long relative propositions produce a diffuse halo around a message that is sometimes difficult to decipher. “If you understood me, it is because I expressed myself badly” stated Alan Greenspan, an expert in circumlocution and tangent-creating. On 26 July 2012, Mario Draghi turned his back on a long tradition of formal speeches: after the “Norpois”( 1) years, we have embarked on the no-frills message: “Believe me, it will be enough… “

Six months later, a spectacular amount of ground has been covered: Italy, which was refinancing its 10-year debt at 6%, is now doing so at 4.2%, while Spain has dropped its rate from 7.5% to 5.1%. Better still, Spanish Prime Minister Mariano Rajoy stated last week that barring a fresh deterioration in debt, the country would not even call on the OMT plan. While it is clearly too early to hail a victory, the famous guarantee mentioned by Mario Draghi may never have to be exercised. If the process to stabilise European debt continues, history will probably note in a few well-chosen words that a central banker managed to turn around negative debt momentum in the euro zone (€8524bn in outstanding loans nevertheless!).

This would clearly be a limited view: behind the declaration, fundamental work was carried out to convince European partners (especially the Germans) that if necessary, they would have to be prepared to mobilise these famous unlimited amounts. To be credible, the ECB’s dissuasions requested German approval and Mr Draghi was clearly skilled in obtaining it.

History will forget the policy as stockmarket noise and will only remember the words. As pragmatic investors, we have taken note of this specific moment when the euro zone was restored to its feet. As convinced Europeans, we have above all learnt the lesson that in a euro zone albeit weakened by its first major financial crisis, determination produces the best results. In the words of Jean Monnet (2), one of the founding fathers of Europe, “what’s important, is to be neither optimistic nor pessimistic, but to be determined”.

Didier LE MENESTREL
with the assistance of Marc CRAQUELIN

(1)     Character in Proust’s The Search for Lost Time
(2)     French politician (1888-1979)