Mario Draghi

Introduction
Mario
Mario Draghi
Draghi is
is anItalianeconomist,
anItalianeconomist, manager
manager and
and banker
banker who
who
succeeded
succeeded Jean-Claude
Jean-Claude Trichetas
Trichetas thePresident
thePresident of
of the
the European
European
Central
Central Bankon
Bankon 1st
1st Nov
Nov 2011
2011
Career
Executive Director World Bank (1984-1990)
General Director Italian Treasury (1991-2001)
Chairman - Committee for revision of Italian corporate and
financial legislation and draft law that governs Italian financial
markets
Managing Director Goldman Sachs International (2002-2005)
Governor Bank of Italy (2005)
Member of the Governing and General Councils of theECB
Member of the Board of Directors of theBank for International
Settlements
Chairman of the Financial Stability Forum
Governor for Italy on the Boards of Governors of theInternational
Bank for Reconstruction and Developmentand theAsian

Early Life

He was born inRome, where he studied at theMassimiliano Massimo Institute and

graduated fromLa Sapienza Universityunder the supervision ofFederico Caff
He earned aPhDin economics from theMassachusetts Institute of Technologyin
1976 with his thesis titledEssays on economic theory and applications, under the
supervision ofFranco ModiglianiandRobert Solow
He was full professorat the Cesare Alfieri Faculty of Political Science of
theUniversity of Florencefrom 1981 until 1994 and fellow of the Institute of Politics
at theJohn F. Kennedy School of Government,Harvard University(2001).

Recognition
In 2014 Draghi was listed as the8th most powerful person in the worldby Forbes.

In 2015Fortunemagazine ranked him as the world's second greatest leader

Italian Policies

As chairman of a national committee for privatization, he played a central

role in reducing Italys public debt and annual budget deficits and in
stabilizing interest rates and currency exchange rates. Those actions
succeeded in allowing Italy to qualify for participation in the European
monetary union of 1999
In 2006 he took over the governorship of the Bank of Italy, and for the next
five years he worked at introducing responsible management and strict
monetary policy in that institution as well
As governor of Italys central bank, Draghi was a member of the ECBs
governing council, which sets interest rates in the euro zone
On 5 August 2011 he wrote, together with the immediate past governor of
theECB,Jean Claude Trichet, a letter to theItalian governmentto push for
a series of economic measures

Responses

Solutions
Permanent
Bailout Fund
(ESM)

A permanent bailout fund

with more capital to
provide funds to member
states with financial
instability
Subscribed capital 700 b
(80b paid-in and 620b
guarantees)
Maximum lending
capacity 500b. with a
40% cushion
Loans to a euro area

Establish unified banking

supervisory, deposit guarantee and
resolution system to minimize
systemic risks and create a stable
banking system.

ECB Bond
Buying
Program (OMT)

Buy sovereign bonds in

secondary market to lower
yields and thereby long-term
interest rates

Reduce the occurrence and

magnitude of bank failures
Resolution framework will make
bank restructuring more efficient

Banking Union

Euro-zone governments to
forgive or take a haircut on
their Greek debt
State debt in excess of the 60%
to be pooled and paid off over a
20- years.

Debt Relief
Proposals

Debt Dynamics

Baseline Scenario
Debt will continue to
increase
Unsustainable except
for
Spain

The Eurozone: Intertwined

Economies
Euro: The currency that ties together 19
European
countries in an intimate but flawed
manner
Introduced for ease of doing business
among the
European countries: Exchange and Tariff
fees
Common monetary policy, different
fiscal policies
PIIGS and the debt crisis

USD/EUR

Franc
e
Higher share of agriculture sector
Agriculture sector contributes for around 2 per cent of GDP, the sector is less
prone to recessional fluctuations.

Tourism driven nation

France is one of the most tourism driven countries. Tourism might slow down
during recession, yet generates considerable revenue otherwise.

Limited governmental interference

The government at one time had majority ownership in commercial banks and
key industries. There is a considerable reduction in holdings recently.

Robust trade relations with economic giants

France enjoys trading with mighty economies like the US, Germany and Great
Britain. Close relationship assists in tackling the recession on many levels.

The
French
often
disparage
the
U.S.
economic model
for
rewarding short-sighted
greed with indecent
executive
compensation, for its
myopic focus on share
price rather than widerview
company
performance, and for its

Germa
ny
Strongest and Biggest Economy in Europe
This is the country every European nation relied upon during the debt crisis
situation. It agreed to repay the bills against fulfilment of austerity measures.

Very Responsible Financially

Germany is extremely inflation averse; keeps a close eye on borrowing and
spending. Germans meticulously pay taxes which are on a higher side (~40%).

ECBs Policy Easing and Germany

Mario Draghi is believed to embark on further policy easing, as a result of which
Germanys five year cost of borrowing has dropped to a record -0.23%.

One of the Largest Exporters in the World

Germany is the 3rd largest exporter in the world, enjoys robust trade relations
with giants like France, the US, UK and China.

Debt crisis in Eurozone

one was never as close to doomsday as in the summer of 2012.

preads of the Eurozone periphery countries surged and the epicentre of the crisis shifted from Greece and Portugal to lar
such as Spain and Italy.
2012 the ECB President Mario Draghi eventually announced that the Bank would do whatever it takes (within [its] man
ro. Shortly after, on 2 August 2012 the ECB declared its intention to perform outright government bond purchases.
ember 2012 the Bank finally formalised its lender of last resort (LOLR) role via the Outright Money Transaction (OMT) pro
for those Eurozone countries who would be eligible for European Stability Mechanism funding; that is, only for solvent bu

tic increase in default risk in many Eurozone countries had nothing to do with market panic or financial speculation; it wa
man sceptics as the natural reflection of economic mismanagement in these countries, and hence should be corrected b
nt (i.e. austerity and structural reforms).

Portugal
the country has run up
The
unsustainable
most
of the
country has run updebts,
unsustainable
debts(130%
of GDP), 70% of the money is owed to foreigners.
money is owed to foreigners, and
. Once household and corporate debt is added into
the
economy
deep
the with
equation,
Portugal
has morestill
debt in
in total
than
any other eurozone country, Greece included
trouble it may have to default as
The elections later this year might well trigger the
well.Portuguese
The elections
later this year
second
crisis.
Portugal might not be saved after all.
may well trigger the second
The recovery does not look very durable. It is
Portuguese
spending
and that
mainly
is driven by crisis
consumer
and a will
cyclical uptick in investment.
reveal how the problems in Europe
Exports continue to fall, and unemployment is
involve
more
than
just
still
rising far
the latest
figures
show
it upGreece,
to 13.7%
of the workforce
even if that attracts most of the
. A country has to grow at 3%-plus simply to keep
worlds
attention
its debts at the
same level
and there is
absolutely nothing to suggest Portugal can achieve
that or anything like it.
The exports are falling due to competition from
asian countries.

Spain
n up unsustainable debts, most of
It is exports that has revived Spain from a
the money
financial
crisis. is owed to foreigners,
Spainwith
copiedthe
German
model. In 2014
one
and
economy
stillalmost
in deep
third of Spanish
trouble
it maywere
have
to outside
default
goods
and services
shipped
the as
country.
well. The elections later this year
25000 new jobs were created in car factories .
may
well trigger
the
second
Spain
is embarking
on a dream
liberalization
program.
Portuguese crisis and that will
But the progress on the job market is puny.
reveal
how impossible
the problems
Europe
It is still almost
for youngin
Spaniards
to
get a permanent
job in their
homeland.
In some
involve
far more
than
just Greece,
places, temporary contracts are as valuable as a
evenlottery
if that
attracts
of are
the
winning
ticket.
Universitymost
graduates
more likely to
find an adequately
paying job in
worlds
attention
Antwerp, London or Frankfurt.
Unlike Greece, Spain has internationally
competitive companies. But as in Athens, the
recovery is threatened by political uncertainties.

Greece
the country has run up
Greece
became the epicenter
of Europes
debt
unsustainable
debts,
most of
the
crisis after Wall Street imploded in 2008.
money
owed
to foreigners,
and
With
global is
financial
markets
still reeling, Greece
announced
in October
2009 that
it had
with the
economy
still
inbeen
deep
understating its deficit figures for years, raising
trouble
have
to default
alarms
about it
themay
soundness
of Greek
finances. as
Suddenly,
Greece
was shut out
from borrowing
in
well. The
elections
later
this year
the financial markets. By the spring of 2010, it was
may
well
trigger
thethreatened
secondto set
veering
toward
bankruptcy,
which
offPortuguese
a new financial crisis.
crisis and that will
To avert calamity, the so-called troika the
reveal how
the problems
in Europe
International
Monetary
Fund, the European
Central
Bank
and thefar
European
issued
the
involve
moreCommission
than just
Greece,
first of two international bailouts for Greece, which
even
if that
attracts
of euros,
the
would
eventually
total
more thanmost
240 billion
or about $264worlds
billion at todays
exchange rates.
attention
The bailout money mainly goes toward paying off
Greeces international loans, rather than making its
way into the economy.
Deep economic reforms and change in laws are
needed

Italy
the country has run up
Italy
unsustainable
debts,economy,
most of
theis
has a diversified industrial
which
divided into a
money is owed to foreigners, and
developed industrial north, dominated by private
with the economy still in deep
companies,
and a less-developed, welfare-dependent,
trouble it may have to default as
agricultural south,
well.
elections later this year
with
highThe
unemployment.
The Italian economy is driven in large part by the
may well trigger the second
manufacture of high-quality consumer goods
Portuguese
crisis
and enterprises,
that will
produced
by small and
medium-sized
many of them family owned.
reveal how the problems in Europe
The international financial crisis worsened
involveinfar
more
than just
conditions
Italys
labor market,
with Greece,
unemployment rising from 6.2% in 2007 to 8.4% in
even if that attracts most of the
2010, but in the longer-term Italys low fertility rate
worlds
attention
and quota-driven
immigration
policies will
increasingly strain its economy
The Italian government has struggled to limit
government spending, but Italys exceedingly high
public debt remains above 115% of GDP, and its
fiscal deficitjust 1.5% of GDP in 2007exceeded

Effect on M1 & M3 - Implications for ECB

Effect of Nominal Cost of Bank Borrowing

for NFCs

Effects on Indebtedness & Systemic Stress

Still elevated public and nonfinancial private

sector debt levels
Insufficient progress in deleveraging in
several countries

The SovCISS combines data from the short

end and the long-end of the geld curve (twoyear and ten-year maturity bonds) for each
county. i.e. two spreads between the
sovereign yield and the euro swap interest
rate (absolute spreads), two realized yield
volatilities (the weekly average of absolute
daily changes) and two bid-ask bond price
spreads (as a percentage of the mid-price).

Recent Risk Developments

Draghi interest rates announcement over timeline

June 2014
At its June monetary policy meeting, the ECB cut the rate on its deposit facility for banks from 0 percent
to minus 0.10 percentthe first time a major global central bank has moved rates into negative territoryin effect charging lenders to park money with it. Its move was part of a series of measures to combat
the euro zone's growth-sapping disinflation and give a push to its stuttering economic recovery. These
interest rates were in order to get funds flowing to businesses and households.

September
2014

The ECB cut its main refinancing rate to 0.05% from 0.15% previously.
It also drove the overnight deposit rate deeper into negative territory, now charging banks 0.2% to leave
funds with it - and cut its emergency borrowing rate to 0.3%.
He announced that bank would buy broad portfolios of simple and transparent asset-backed securities
and of euro-denominated covered bonds from October.

2015
ECB hadnt expanded its QE programme, or hit the banks with tougher negative interest rates.
Effect- Every share on the German DAX closed slower, sending the index down by 3.5% -- which looks like
its biggest one-day decline since mid-September. The London also fell sharply in sympathy. The FTSE 100
shed 145 points, or over 2%.