The Greek tragedy of Mario Draghi
Central banking is difficult. It requires bankers not only to plan for how they think the future is going to play out, but plan for how they fear it might play out, too. But even the best plans won’t be enough if central bankers don’t know how to talk about them. Banking is all about what is going to happen in the future - who is going to pay whom, and how - so central bankers need to be adept at manipulating the future in the present day. Like everyone else, they do that with words. Each one must be precisely calibrated to instill certain expectations in listeners and readers.
The bankers who didn’t know this must surely have learned it with the global financial crisis of 2008. The future became very uncertain in those heady days, and central bankers needed to convince people that they were still in control. I think that with the G-20, which came to fruition during that crisis, the International Monetary Fund (IMF) has reinvented itself and is now contributing to this task. Ben Bernanke of the Federal Reserve earlier, and now Mario Draghi of the European Central Bank (ECB) have become masters of using words to master the present and thereby the future. Draghi’s often-quoted dramatic statement, “the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough,” in July of 2012 stopped the flight from the currency. But things have unraveled since then.
Draghi has struggled hard to stay neutral when it comes to the unfolding Greek crisis. Yet, as was noted in the Wall Street Journal about a week ago, he finds himself in the position of Michael Corleone in The Godfather Part III, who said: “Just when I thought I was out, they pull me back in.” He has provided Greek banks with 118 billion euros in emergency liquidity assistance (ELA) - about two-thirds of the Greek GDP.
That was a huge liquidity assistance program showing that he discriminates between the financial stability of the Greek banks and the default of the Greek government. Well, that was before last Monday. Everything has changed now.
When the Greek government announced that there was going to be a referendum, the ECB withdrew additional support to Greek banks beyond the already established ELA framework. It went back on its word.
The ECB is also the central bank of Greece, not a mere extension of the Bundesbank, yet it signaled that it would no longer do what it takes to preserve the stability of the financial system as a whole. The default of a government on its debt, its inability to make its pension payments and its inability to fund its own payroll, are all political decisions. The Greek government has the right to default, yet their decisions have much wider effects on the financial health of Europe’s banking system.
The decision not to do anything to extend the scope of the ELA has led the Greek government to this bank holiday, weakening the credibility of the whole European central banking experience, if you ask me. That could have been avoided if the ECB had stood its ground. There may be technical details supporting the ECB’s decision, but it played haywire with the message the bank should send. It’s like using bad language in a delicate situation. Just when Draghi thought he was out, these foul-mouthed politicians pulled him back in.