01/11/2012 Letter to Mister Mario Draghi
Paris, 11th January 2012
Dear Sir,
My warmest congratulations! Within just two months, you have reversed the unfortunate rate rises introduced by your predecessor, given banks unlimited access to euro and dollar funding, and encouraged European countries to adopt a fiscal compact plan as a prerequisite to the ECB lending firmer support to the sovereign debt markets. You have thus implicitly enhanced the credibility of the Bank by extending its mandate beyond the conduct of a pernickety inflation control monetary policy, to the preservation of a satisfactory level of economic activity in the entire Eurozone.
However, you will have to agree that results so far have been disappointing. The weighted cost of debt in all Member States has continued to increase over the past two months (from 4.40% to 4.80%), banks have raised their unused deposits at the ECB to an unprecedented level (close to 500 billion euros), and the growth outlook is darkening across the Eurozone. How has this come about? As we know, the restoration of public finances and the process of structural reform will take months, if not years, to bear fruit, and comes with the immediate cost of a decline in economic activity, which cannot be financed by the markets without the support of a lender of last resort. How can it be possible for a country you know well – Italy - to refinance 63 billion euros of long-term debt maturing in the next three months, given an interest rate of 7% and a forecast of negative growth this year which imply that debt servicing will be problematic, to say the least?
Undeniably, the new Italian and Spanish governments have solid reformist credentials. Would it not be worth giving them a helping hand before public pressure forces them to back down? Thereby, as I suggested to your predecessor three months ago, I would consider it imperative for the ECB to declare its intent to purchase unlimited amounts of distressed sovereign debt, without sterilising these interventions. Unlimited, because if buying continues to be reduced, debt servicing costs will merely be capped at existing rates. To prevent abuse, you could enforce that once the Bank’s total purchases exceed a given percentage of a country’s GDP, that country would be required to follow an IMF structural adjustment programme. Non-sterilised interventions are necessary, given that monetary creation will help to curb the deflationary pressures generated by the current recession and the shrinking of banking balance sheets.
The situation is serious and calls for decisive action. The ECB alone is in a position to act, as the fanciful claims made for the European Financial Stability Facility (EFSF) are likely to remain wishful thinking with the ratings of most European countries proving so fragile. As Director General of the Italian Treasury in the early 90s, you earned the flattering nickname of ‘Super Mario’ while overseeing Italy’s entry to the Eurozone. In turn, Europe today needs Super Mario to fix the defective plumbing of its public finances and guarantee the long-term future of the euro.
Major challenges generate great expectations which, I trust, you will endeavour not to disappoint.
Yours truly,
Edouard Carmignac