Tag Archives: Lorenzo Bini Smaghi

Former Goldman Sachs Banker Become New ECB President

Italian central banker and former Goldman Sachs employe,  Mario Draghi, has won the backing of EU leaders to become the next president of the European Central Bank (ECB) from the November. Draghi entered the spotlight when it became clear that Goldman Sachs was swapping Greek debt to cover up the economic disaster.

“The deals were undertaken before my joining Goldman Sachs and  I had nothing to do with them.”

Mario Draghi

The EU leaders made the decision at a European Summit in Brussels on Friday at a time of unprecedented turmoil for the 17-member euro zone.

“We are all confident that Mr Draghi will exercise strong and independent leadership of the ECB, continuing the tradition started by the banks first two presidents,” European Council President Herman Van Rompuy told journalists after the meeting.

Adding: “This is essential in normal times and indispensable in difficult times.”

A potential hurdle to Draghi’s smooth takeover from current ECB President Jean-Claude Trichet was removed earlier in the day, amid French concerns of a loss of influence on the bank’s executive board.

With Trichet stepping down, France will be without a member on the six-person panel, while Italy will have two in the form of Draghi and Lorenzo Bini Smaghi.

An implied French threat to block Draghi’s takeover was averted however when Smaghi signaled he would step down before the end of his full term expired.

“I spoke to Mr Smaghi this morning by phone and he did tell me personally that he would not see his mandate as a member of the governing board through to its end,” Van Rompuy says.

“It’s up to Mr Smaghi to decide what timetable he may have.”

Full story at the EUobserver.com.

Right Man at the Right Place at the Right Time

Born in Rome, Draghi graduated from La Sapienza University of Rome under the supervision of Federico Caffè, then earned a Ph.D in economics from the Massachusetts Institute of Technology in 1976 under the supervision of Nobel Laureates Franco Modigliani and Robert Solow.

He was full professor at the University of Florence from 1981 until 1991.

From 1984 to 1990 he was Executive Director of the World Bank.

In 1991, he became director general of the Italian Treasury, and held this office until 2001.

During his time at the Treasury, he chaired the committee that revised Italian corporate and financial legislation and drafted the law that governs Italian financial markets.

He is also a former board member of several banks and corporations (Eni, IRI, BNL and IMI).

Draghi was then vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee between 2002–2005.

A controversy erupted on his duties while employed at Goldman Sachs.

Pascal Canfin (MEP) asserted Draghi was involved in swaps for European governments, namely Greece, trying to disguise their countries’ economic status.

Draghi responded that the deals were “undertaken before my joining Goldman Sachs and  I had nothing to do with” them, in the 2011 European Parliament nomination hearings.

Draghi is a trustee at the Institute for Advanced Study in Princeton, New Jersey and also at the Brookings Institution, in Washington, D.C..

He has also been a Fellow of the Institute of Politics at the John F. Kennedy School of Government, Harvard University.

Wonder if this will bring back confidence to the financial markets?

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EU Leaders Trigger Another Market Panic

As pointed out by Markit yesterday, the EU leaders has come up with another financial agreement, and once again the bond markets panic. The agreement is a proposal to replace the European Financial Stability Facility (EFSF) with a new mechanism that allows the EU authorities to “bail-in” the holders of sovereign bonds. This means in practice that investors may be facing interest free periods on their bonds, as well as other forms of “haircuts” on their investments. The proposal will also dramatically increase the probability of sovereign default in the euro zone.

“This whole chain of events shows clearly that EU leaders continue to underestimate the complexities of a monetary union.”

http://www.eurointelligence.com


Last Friday’ summit only agreed on some minimum parameters for president of the EU Council Herman van Rompuy’s next task force, but the difference in views between the EU members on how the crisis resolution mechanism should be is still remain extreme. Germany wants the “bail-in” mechanism to replace the EFSF. As a result European bond spreads is on the rise again, with borrowing costs increasing for the most troubled EU nations.

The gap between the German position on future crisis resolution in the euro zone and of other EU member states is a fundamental conflict that remain unresolved.

Germany is favoring a mechanism that allows an “orderly default” of the EU nations with the largest debt burden and the most severe economic problems.

Investors understand that the German proposal will dramatically increase the probability of future sovereign default in the euro zone.

In addition, they could be forced to accept interest pauses on their bond holdings, as well as other forms of so-called “haircuts”.

However, most of the other EU leaders have taken a stand against any sovereign default within the euro zone.

Here’s Herman Van Rompuy, President of the European Council, outlining the recommendations of the Task Force presented to the EU Heads of State or government on Friday.

Vodpod videos no longer available.

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The Show Will Go On

The EFSF is not a solution to a crisis resolution, it is merely a temporary arrangement set to expire in 2013.

The European Financial Stability Facility (EFSF) is a special purpose vehicle (SPV) agreed on by the 27  member states of the European Union on 9 May this year, with the intent to preserve financial stability in Europe by providing financial assistance to euro zone states in financial trouble.

The proposal that now is on the table is supposed to replace the EFSF, maybe before the EFSF expires.

That will be decided by voting in the EU Parliament, next year at the earliest.

There’s a long and winding road ahead…

Turkeys Voting For Christmas

Italian ECB board member Lorenzo Bini Smaghi says, according to Reuters, that it was easy to talk about an orderly crisis resolution mechanism, but much more difficult to implement it:

“In advanced economies the restructuring of the public debt would have to involve a much larger number of financial assets and liabilities, including those of the domestic banking system, vis-a-vis residents and non residents… It can be easily seen that there can hardly be anything ‘orderly’ in such a process.”

And it’s hard to imagine Greece, Ireland, Spain, or Portugal agreeing to a crisis resolution mechanism, whose main effect would be to drive up their bond rates.

It would be like “turkeys voting for Christmas.”

“This whole chain of events shows clearly that EU leaders continue to underestimate the complexities of a monetary union,” eurointelligence.com comments.

The structure is simply not capable of handling default, and at the same time ruling out bailout and exit.

This could easily go on until the EFSF expires in 2013.

Meanwhile, all we can do is watch the credit market falling apart – piece by piece.

French Fury – Irish Bailout

“Will all the lawyers please the room,” Le Monde writes Tuesday.

(As understandable as this wish may be, it is perhaps a bit unrealistic.)

Le Monde argues that it is crazy trying to renegotiate the financial stability treaty, and that leaders should focus on what they need, rather than engaging in long detours.

Ireland is perhaps the EU state with the most acute problems right now, after the nations CDS spreads closed above the 500bp level yesterday, near a new all-time-high.

In an article in the Irish Independent today,  Colm  McCarthy does the math on the Irish goverment’s refinance operations.

The Irish government has postponed their borrowing in September and October, due to the high borrowing. But the borrowing is only postponed, McCarthy points out.

And the Irish borrowing costs keep rising.

“What happens if the re-entry into the bond does not work?,” McCarthy asks.

Answer: A bailout by the EFSF – of course!

10-year sovereign yields

Previous day Today
Greece 7.095 8.640
Ireland 4.054 4.744
Portugal 3.259 3.794
Spain 1.618 1.804
Belgium 0.786 0.826

Euro bilateral exchange rates:

Previous day Today
Dollar 1.3818 1.3935
Yen 112.88 112.29
Pound 0.8731 0.8678
Swiss Franc 1.3636 1.3814

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