Wessel’s Kudos for Draghi

When the US jobless rate does fall to 6.5%, Fed officials are likely to regret that they didn't follow the lead of ECB President Mario Draghi. As David Wessel observed in his WSJ column today, in late July last year, Draghi “defused an intensifying crisis of confidence in the euro with two sentences scribbled in the margins of an otherwise routine speech. ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,’ he said. ‘And believe me, it will be enough.’ That may prove to be the most successful central-bank verbal intervention in history.” Wessel noted:

A few weeks later, the ECB pledged to buy bonds of governments shunned by markets if those governments made belt-tightening commitments accepted by fellow euro-zone countries. No government has sought that help so the ECB hasn't spent a single euro. Yet global anxiety about an imminent euro crisis has abated.

That’s been reflected in a dramatic drop in the 10-year yields on the bonds of Spain and Italy (Fig. 3). The imbalances among the members of the ECB's TARGET2 payments system have stopped deteriorating in recent months (Fig. 4). The size of the ECB's balance sheet has actually declined slightly by €146 billion since June 29 of last year through January 4 (Fig. 5). Another positive sign for the euro zone was the announcement last Thursday that not one bank has used the ECB’s emergency overnight marginal lending facility since August 2011. Banks are facing less stress, and interbank lending is rising. The FTSE Eurofirst 300 Banks Euro Index is up 8.1% since the start of the year and 44.3% since Draghi’s speech at the end of July (Fig. 6).

Contributing to the powerful rally in bank stocks was the proposal of the Council of the European Union for a Single Supervisory Mechanism (SSM) for banks in the euro zone. The SSM is the first step in the formation of the European Banking Union. It grants the ECB direct powers to supervise and regulate the euro zone banks, especially the large ones. Another boost for the bank stocks was last week’s easing of liquidity rules by the Basel Committee on Banking Supervision, as I discussed on January 2. Confidence in the future integrity of the euro zone is also reflected in the euro, which is up from last year’s low of 1.21 on July 24 to 1.33 this morning (Fig. 7).

(Based on an excerpt from YRI Morning Briefing)