Consilio et animis: Axa’s Fixed Income CIO Iggo applauds the ECB

Chris Iggo, CIO Fixed Income at Axa Investment Managers says that Mario Draghi is doing what neither of his predecessors could do in facing down the Bundesbank.

Consilio et animis (by wisdom and courage)

Was yesterday the beginning of the Latin fight back? ECB president Mario Draghi did what neither of his two predecessors was able to do, by facing up to the Bundesbank and challenging the notion that the ECB can only be successful if it follows a hard-line German style monetary policy.

The ECB’s first president, Wim Duisenberg, was a safe choice at the helm of the nascent central bank in 1999 having successfully steered Dutch monetary policy by doing exactly what the guardians of the Deutsche Mark did.

He was never going to do anything rash when the new currency was bedding in and the architects of the Euro were still obsessed with convincing the world that it would be a super-hard currency.

Jean-Claude Trichet’s appointment as successor was agreed well in advance, giving France the influence over the evolution of the growing euro area that it had long sought as a key player in the design of the new Europe. At times Trichet sounded like Karl-Otto Pohl or Helmut Schlesinger, so keen was he to dispel any notion of a soft Franco underbelly to monetary policy in the new union.

Then came the crisis and then came super Mario. Since his appointment Europe is gradually getting a monetary policy that is more flexible and more suited to the very divergent economic conditions across the European monetary area. More importantly, we are getting a monetary policy that stands a better chance of actually keeping the euro as a viable currency.

Will the OMT be better than the SMP and the LTRO?

As an Italian, Draghi will understand how membership of the single market and single currency has benefitted southern European economies. He is also keenly aware of how those benefits could be lost if the debt crisis were allowed to conclude in default and redenomination.

The bond buying plan is a welcome additional policy tool to tackle the political and economic problems of today’s Europe. The ECB will purchase unlimited amounts of short term government debt of countries that agree to some kind of conditionality. Importantly, the conditionality it has in mind is less strict than that imposed on Greece, Ireland and Portugal.

As important is the waving of senior creditor status for the new programme. These two conditions suit beneficiary countries – most likely to be Spain and Italy – because they will have more flexibility in designing their austerity programmes and private investors who don’t have to consider a significant jump in the “loss given default” calculation as the ECB would also take a hit if there were any sovereign debt losses.

In that sense, because of the packaging of the OMT, it should be more effective than the previous liquidity programmes.

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