Global News
MARIO DRAGHI was working the room as only Mario Draghi can.
The occasion was a gala at the Old Opera House here in honor of Jean-Claude Trichet, the most powerful central banker in Europe. But in some ways, the evening belonged as much to Mr. Draghi, the Italian who will succeed Mr. Trichet on Tuesday as the president of the European Central Bank in the midst of an economic maelstrom that threatens to tear apart the euro, if not Europe itself.
European leaders took a step toward resolving the crisis last Thursday, with an agreement from banks to take a 50 percent loss on the face value of their Greek debt. Far from heralding an end to the problems, however, the plan ushered in a crucial new phrase in the battle to avert financial disaster.
But despite the challenges awaiting him, Mr. Draghi was in fine form that night earlier this month. Over here, he chatted quietly with Angela Merkel, the chancellor of Germany and a main ally. Over there, he met with Christine LaGarde, the managing director of the International Monetary Fund. And everywhere, Mr. Draghi vowed that there would be no surprises on his watch.
It was vintage Draghi, a performance so subtle and politic that it seemed to please everyone. Which, it turns out, is the Draghi way: people often seem to see what they want to see in him.
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.
“I have a very high regard for him,” says Otmar Issing, the influential German economist and a former member of the central bank’s executive board.
Mr. Issing recalls the initial reaction in Germany to the appointment of an Italian to head Europe’s central bank. The German newspaper Bild joked that Italy without inflation was like spaghetti without tomato sauce. It later backpedaled and ran an image of Mr. Draghi wearing a spiked Prussian helmet, saluting him as a German-style central banker.
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. He was, effectively, unchallenged for the top job at the European Central Bank.
Born in Rome, he lost both his parents while in his teens and, along with a brother and sister, was raised by relatives. He honed his networking skills while pursuing a doctorate in economics at M.I.T., on a scholarship.
“He was quietly intelligent — nothing flamboyant; he just knew his stuff,” says Robert M. Solow, the Nobel laureate economist and professor emeritus at M.I.T.
At M.I.T., Mr. Draghi studied under another Nobel laureate, Franco Modigliani, and forged long-lasting ties with Stanley Fischer, now head of Israel’s central bank. Mr. Draghi also took classes with Rudiger Dornbusch, the international economist who postulated that in flexible, multi-exchange rate systems, a single currency can overshoot its intrinsic value — an idea that was often cited by supporters of the euro as a reason to adopt the single currency.
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.
“We came very close to default,” recalls Francesco Giavazzi, a classmate from M.I.T. who was part of brigade of technical experts — known then and now as the Draghi boys — who joined Mr. Draghi at the Italian treasury. But what Mr. Draghi learned from that experience remains with him, Mr. Giavazzi says.
“The lesson is that rather than waiting for help, you need to regain the confidence of the markets through your own actions, and that if you do not do the right thing, no outside help is enough — you will have a solvency problem,” Mr. Giavazzi says.
In that vein, Italy liberalized its financial markets and privatized about 15 percent of its economy in the period leading up to monetary union at the start of this decade.
It was a heady time. Various Italian governments came and went, but one constant was Mr. Draghi and his troupe of economists. Gustavo Piga, now a professor at the University of Rome, recalls the relentless focus on keeping foreign bond investors from abandoning Italy.
“I prepared this very technical presentation on how the government was not reimbursing foreign investors for a withholding tax they paid on their bonds and this made the interest rates too high,” Mr. Piga says. ”He quickly signed off on it and after that there was a huge collapse in rates.”
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.
Goldman and Mr. Draghi have each said that he had no involvement in the Greece-Goldman initiative, although one Goldman executive based in Europe, who was not authorized to speak publicly, said Mr. Draghi had discussed similar initiatives with other European governments.
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?”
Robert C. Merton, the Nobel laureate economist at Harvard and a co-writer of the paper on derivatives with Mr. Draghi, says that in addition to exploring how countries might use derivatives to mitigate their risks, their study examined how markets habitually underestimate the risk of contagion.
As Europe struggles to contain the spread of its own debt problem, how Mr. Draghi deals with this crucial task will define his success or failure as Europe’s top central banker.
“All this is ingrained in him — he understands risk and asks the right questions,” Mr. Merton said.
==============================================================================
By: Landon Thomas Jr. and Jack Ewing
Source: The New York Times, October 29, 2011
To view the original article, click here.
Subscribe to the Arangkada NewsRoom via RSS
Comment here