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Mario Draghi

Mario Draghi is anItalianeconomist, manager and banker who succeeded Jean-Claude Trichetas thePresident of the European Central Bankon 1st Nov 2011Career

Executive Director World Bank (1984-1990)General Director Italian Treasury (1991-2001)Chairman - Committee for revision of Italian corporate and financial legislation and draft law that governs Italian financial marketsManaging Director Goldman Sachs International (2002-2005)Governor Bank of Italy (2005)Member of the Governing and General Councils of theECBMember of the Board of Directors of theBank for International SettlementsChairman of the Financial Stability ForumGovernor for Italy on the Boards of Governors of theInternational Bank for Reconstruction and Developmentand theAsian Development BankTrustee at Institute for Advanced StudyinPrinceton, New Jerseyand also at theBrookings Institution, in WashingtonIntroductionEarly LifeHe was born inRome, where he studied at theMassimiliano Massimo Institute and graduated fromLa Sapienza Universityunder the supervision ofFederico CaffHe earned aPhDin economics from theMassachusetts Institute of Technologyin 1976 with his thesis titledEssays on economic theory and applications, under the supervision ofFranco ModiglianiandRobert SolowHe was full professorat the Cesare Alfieri Faculty of Political Science of theUniversity of Florencefrom 1981 until 1994 and fellow of the Institute of Politics at theJohn F. Kennedy School of Government,Harvard University(2001).

In 2014 Draghi was listed as the8th most powerful person in the worldby Forbes.In 2015Fortunemagazine ranked him as the world's second greatest leaderRecognitionItalian PoliciesAs chairman of a national committee for privatization, he played a central role in reducing Italys public debt and annual budget deficits and in stabilizing interest rates and currency exchange rates. Those actions succeeded in allowing Italy to qualify for participation in the European monetary union of 1999In 2006 he took over the governorship of the Bank of Italy, and for the next five years he worked at introducing responsible management and strict monetary policy in that institution as wellAs governor of Italys central bank, Draghi was a member of the ECBs governing council, which sets interest rates in the euro zoneOn 5 August 2011 he wrote, together with the immediate past governor of theECB,Jean Claude Trichet, a letter to theItalian governmentto push for a series of economic measures

ResponsesBank Liability Guarantees Purpose: State guarantee of liabilities of banks to restore confidence in banks and prevent bank runs and a liquidity crisis. Irish blanket liability guarantee: guaranteed all deposits and debts of the six largest in Sep 2008 (485b, about 319% of GDP). Policy discussion Helped stabilize the banking system Socialized private debt Increased sovereign debt burden

Bank Recapitalizations & Nationalization Purpose: Prevent bank solvency crisis. Instruments: common shares, preferred shares and other hybrid instruments Examples: Ireland: Anglo Irish, Nationwide Building Society, Allied Irish (AIB), BOI, EBS Building Society Spain: Savings banks (Cajas); Bankia Policy discussion Restored bank solvency. Potential losses to tax payers. Increase public debt load.

Asset Support Schemes Purpose: ensure financial stability of banks by either removing impaired assets to a bad bank or insuring against losses Asset removal schemes (Bad banks) Ireland: National Asset Management Agency (NAMA) acquired bad assets worth 74b at an average haircut of 57% through bond for loan swap. Spain: bad bank being set-up with part funding by bailout fund. Policy discussion Stabilized bank balance sheets Difficult to value, overpayment to buy bad assets Socialized private debt, taxpayers bear losses Increased public debt

Liquidity Support Purpose: Improve market liquidity in public and private debt securities market. Instruments Covered Bond Purchase Program (CBPP) - June 2009 Oct 2012 Buy eligible covered bonds from banks in the primary and secondary markets. Securities Market Program (SMP) May 2010 Sep 2012 Buy eligible bonds issued by eurozone governments and public entities (secondary market) and private entities (primary and secondary markets). Long-term Refinancing Operations (LTRO) Dec 2011 & Feb 2012 Long-term credit (up to 3 years) on the basis of collateral. 1,047b Emergency Liquidity Assistance (ELA) Life Support Since 2008 Credit line to NCBs to provide emergency funds to banks that cannot put up acceptable collateral to ECB for regular refinancing (Greece, Ireland, Germany, Belgium). 233b Policy discussion Helped lower & stabilize sovereign bond yields Provided liquidity for banks to continue to lend Helped finance budgetary and debt repayment needs (via ELA) Risks of ELA borne by the NCBs and hence the government.

Bailout Programs Purpose: Provide loans by EU & IMF to help finance the budget deficit, debt repayments and bank recapitalizations. 110b May 2010 Greece 85b Nov 2010 Ireland 78b May 2011 130b Mar 2012 Greece Bailouts are conditional on implementation of large austerity programs. Policy discussion Helped fund governments via budgetary support. Helped avert sovereign debt defaults & insolvency. Added to debt stock increasing the sovereign risk. Large budgetary adjustments in a short time span is infeasible. Austerity causing less growth, social unrest and political instability.

Debt Restructuring Purpose: reduce Greeks debt burden through debt reduction and restructuring (March 2012, part of the second bailout) of privately-held debt. Mechanism Debt swap: exchange old bonds for new Greek bonds worth 31.5% and eurozone bailout fund (EFSF) notes worth 15% of face value of old bonds. Haircut: resulted in a 53.5% haircut and reduction of Greek debt from 350b to 250b. Favorable terms: lower coupon: 2% (2012-2015), 3% (2015-2021) and then 4.3%, and longer maturity. Policy discussion Reduced the debt burden. Private investors, not the tax payers, took losses. Losses reduced capital base of Greek banks requiring recapitalization. Not adequate given the enormity of debt stock. Public investors were spared giving a bad signal to the market.

Structural Reforms Purpose: remove impediments to long-term growth by creating a more efficient, competitive, flexible, market-oriented economy. Policy instruments Financial sector reforms (bank recapitalization, deleveraging, prudential capital requirements, reorganization and downsizing of the banking sector, bank resolution regime, strengthen banking regulations and supervision) Entitlement reforms (curtail entitlement and selected social security benefits) Labor market reforms (reduce minimum wage, reform unemployment benefit system) Pension reforms ( increase in state pension age, curtail early retirement) Public administration reforms (modernize public administration & reduce inefficiency) Increase competition in the non-tradables sector (electricity, transportation, and telecommunications) & sheltered sectors (legal, medical and pharmacy ) Privatization of government-owned enterprises. Policy discussion Needed reforms to address root causes of fiscal crisis. Needed reforms to increase competitiveness and growth . Takes a long-term to yield results.5Permanent Bailout Fund (ESM)ECB Bond Buying Program (OMT)Banking UnionDebt Relief ProposalsA permanent bailout fund with more capital to provide funds to member states with financial instability

Subscribed capital 700 b (80b paid-in and 620b guarantees)

Maximum lending capacity 500b. with a 40% cushion

Loans to a euro area member states in financial difficultiesBuy sovereign bonds in secondary market to lower yields and thereby long-term interest ratesEstablish unified banking supervisory, deposit guarantee and resolution system to minimize systemic risks and create a stable banking system.

Reduce the occurrence and magnitude of bank failuresResolution framework will make bank restructuring more efficientEuro-zone governments to forgive or take a haircut on their Greek debt

State debt in excess of the 60% to be pooled and paid off over a 20- years.Solutions

Baseline Scenario

Debt will continue to increaseUnsustainable except for Spain

Debt DynamicsThe Eurozone: Intertwined Economies Euro: The currency that ties together 19 European countries in an intimate but flawed manner

Introduced for ease of doing business among the European countries: Exchange and Tariff fees

Common monetary policy, different fiscal policies

PIIGS and the debt crisis

Austerity measures: The only way out?

The road ahead...

USD/EURFrance

The French often disparage the U.S. economic model for rewarding short-sighted greed with indecent executive compensation, for its myopic focus on share price rather than wider-view company performance, and for its recurrent bubbles and busts.Germany

The Eurozone was never as close to doomsday as in the summer of 2012.The debt spreads of the Eurozone periphery countries surged and the epicentre of the crisis shifted from Greece and Portugal to larger economies such as Spain and Italy.On 26 July 2012 the ECB President Mario Draghi eventually announced that the Bank would do whatever it takes (within [its] mandate) to save the euro. Shortly after, on 2 August 2012 the ECB declared its intention to perform outright government bond purchases.On 6 September 2012 the Bank finally formalised its lender of last resort (LOLR) role via the Outright Money Transaction (OMT) programme albeit only for those Eurozone countries who would be eligible for European Stability Mechanism funding; that is, only for solvent but illiquid countries.The dramatic increase in default risk in many Eurozone countries had nothing to do with market panic or financial speculation; it was deemed by the German sceptics as the natural reflection of economic mismanagement in these countries, and hence should be corrected by better management (i.e. austerity and structural reforms).Debt crisis in Eurozonethe country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well. The elections later this year may well trigger the second Portuguese crisis and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the worlds attentionThe country has run up unsustainable debts(130% of GDP), 70% of the money is owed to foreigners.. Once household and corporate debt is added into the equation, Portugal has more debt in total than any other eurozone country, Greece included The elections later this year might well trigger the second Portuguese crisis.Portugal might not be saved after all.The recovery does not look very durable. It is mainly is driven by consumer spending and a cyclical uptick in investment. Exports continue to fall, and unemployment is still rising the latest figures show it up to 13.7% of the workforce. A country has to grow at 3%-plus simply to keep its debts at the same level and there is absolutely nothing to suggest Portugal can achieve that or anything like it.The exports are falling due to competition from asian countries.

n up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well. The elections later this year may well trigger the second Portuguese crisis and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the worlds attention

PortugalSpainIt is exports that has revived Spain from a financial crisis.Spain copied German model. In 2014 almost one third of Spanish goods and services were shipped outside the country.25000 new jobs were created in car factories .Spain is embarking on a dream liberalization program. But the progress on the job market is puny. It is still almost impossible for young Spaniards to get a permanent job in their homeland. In some places, temporary contracts are as valuable as a winning lottery ticket. University graduates are more likely to find an adequately paying job in Antwerp, London or Frankfurt. Unlike Greece, Spain has internationally competitive companies. But as in Athens, the recovery is threatened by political uncertainties.

the country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well. The elections later this year may well trigger the second Portuguese crisis and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the worlds attentionthe country has run up unsustainable debts, most of the money is owed to foreigners, and with the economy still in deep trouble it may have to default as well. The elections later this year may well trigger the second Portuguese crisis and that will reveal how the problems in Europe involve far more than just Greece, even if that attracts most of the worlds attentionGreeceItaly

Italy has a diversified industrial economy, which is divided into a developed industrial north, dominated by private companies, and a less-developed, welfare-dependent, agricultural south, with high unemployment.The Italian economy is driven in large part by the manufacture of high-quality consumer goods produced by small and medium-sized enterprises, many of them family owned.The international financial crisis worsened conditions in Italys labor market, with unemployment rising from 6.2% in 2007 to 8.4% in 2010, but in the longer-term Italys low fertility rate and quota-driven immigration policies will increasingly strain its economyThe Italian government has struggled to limit government spending, but Italys exceedingly high public debt remains above 115% of GDP, and its fiscal deficitjust 1.5% of GDP in 2007exceeded 5% in 2009 and 2010, as the costs of servicing the countrys debt rose.Greece became the epicenter of Europes debt crisis after Wall Street imploded in 2008.With global financial markets still reeling, Greece announced in October 2009 that it had been understating its deficit figures for years, raising alarms about the soundness of Greek finances.Suddenly, Greece was shut out from borrowing in the financial markets. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.To avert calamity, the so-called troika the International Monetary Fund, the European Central Bank and the European Commission issued the first of two international bailouts for Greece, which would eventually total more than 240 billion euros, or about $264 billion at todays exchange rates.The bailout money mainly goes toward paying off Greeces international loans, rather than making its way into the economy. Deep economic reforms and change in laws are neededEffect on M1 & M3 - Implications for ECB

Effect of Nominal Cost of Bank Borrowing for NFCs

Effects on Indebtedness & Systemic Stress

The SovCISS combines data from the short end and the long-end of the geld curve (two-year and ten-year maturity bonds) for each county. i.e. two spreads between the sovereign yield and the euro swap interest rate (absolute spreads), two realized yield volatilities (the weekly average of absolute daily changes) and two bid-ask bond price spreads (as a percentage of the mid-price).Still elevated public and nonfinancial private sector debt levelsInsufficient progress in deleveraging in several countries

Recent Risk DevelopmentsDraghi interest rates announcement over timelineAt its June monetary policy meeting, the ECB cut the rate on its deposit facility for banks from 0 percent to minus 0.10 percentthe first time a major global central bank has moved rates into negative territory-in effect charging lenders to park money with it. Its move was part of a series of measures to combat the euro zone's growth-sapping disinflation and give a push to its stuttering economic recovery. These interest rates were in order to get funds flowing to businesses and households.June 2014September 2014The ECB cut its main refinancing rate to 0.05% from 0.15% previously.It also drove the overnight deposit rate deeper into negative territory, now charging banks 0.2% to leave funds with it - and cut its emergency borrowing rate to 0.3%.He announced that bank would buy broad portfolios of simple and transparent asset-backed securities and of euro-denominated covered bonds from October.2015ECB hadnt expanded its QE programme, or hit the banks with tougher negative interest rates.Effect- Every share on the German DAX closed slower, sending the index down by 3.5% -- which looks like its biggest one-day decline since mid-September. The London also fell sharply in sympathy. The FTSE 100 shed 145 points, or over 2%.