Sunday, August 5, 2012
A Dose of Dr. Draghi's 'Whatever It Takes'
Wall Street Journal
August 5, 2012
Going anywhere nice this summer? I asked the chief executive of one of the U.K.'s biggest banks last week. "Not sure yet," he said. "I've got a feeling something nasty could happen at any moment in the euro zone, so I am playing it by ear."
Just a week earlier, Spanish and Italian bond yields has soared well above 7%, raising the risk both countries could require some form of bailout that the euro zone seemed financially and politically unable to provide. The situation became so serious that only the intervention of European Central Bank President Mario Draghi, who promised to do "whatever it takes" to save the single currency, prevented a wider meltdown. But the markets were still skeptical Mr. Draghi could deliver on his promise: at a news conference on Thursday, he may have said enough to ensure Europe's bankers can head to the beaches this month. But the risk of something nasty happening hasn't gone away.
Optimism in the euro zone's ability to dig its way out of its crisis has eroded fast since the start of the year. Back in December, it seemed that euro-zone policy makers had stepped back from the abyss and were genuinely committed to do what was necessary to save their currency. Greece was to be given a new bailout, removing the immediate threat of a euro break-up; Spain elected a new government with a mandate to overhaul the economy; and technocratic governments were installed in Rome and Athens, raising hopes that crisis countries were serious about cutting their debts and restoring competitiveness. Above all, the European Central Bank's promise of cheap funding for the euro zone's banks removed the imminent risk of a systemic banking collapse.
But as so often during the global financial crisis, central bankers had bought time and politicians had failed to use it.