Margareta Pagano: Draghi needs a bazooka to fix the eurozone
Sometimes only a huge shock to the system will do
Sunday 09 October 2011
All eyes are on Mario Draghi, the incoming president of the European Central Bank, who takes over from the hawkish Jean-Claude Trichet next month.
Much is riding on Draghi's arrival, as there's no question that Europe's sovereign-debt crisis has been aggravated by Trichet's impending departure, with the markets in limbo, albeit a volatile one, about the ECB's future strategy.
By all accounts, Draghi is a quiet, thoughtful economist, but also a highly political and calculating banker. He's used to making big decisions – in Italy, he handled the government's huge privatisation programme, and he's been bold too at the Financial Stability Board (FSB). So far, the only clues to his EU approach are in a speech he gave in the summer: "It is now necessary to give certainty to the procedure for handling sovereign crises: by clearly defining the political objectives, the instruments and the volume of resources. This is needed to ensure the stability of the area and its currency, and to take full advantage of the strength of its economy and monetary and financial situation."
That's promising, but is he going to be tough enough? What Europe needs is someone capable of firing a bazooka to get the latest Euro-style Tarp off the ground. Could Draghi be that man? In febrile situations such as these, it's as much the personality of our leaders as their strategy which is crucial to shifting opinion. It was only when Hank Paulson, then Treasury Secretary, decided that "I need a bazooka" to stun the markets and recapitalise the banking system that he came up with the $700m ammunition. It worked: American sentiment turned pretty swiftly after the catastrophic Lehman collapse. (And Draghi does have one thing in common with Paulson; they are both ex-Goldman Sachs bankers.)
While the Tarp bailout may not have been perfect, the shock-and-awe approach did get the financial system moving again. Now Europe needs its own bazooka – one that gets the banks recapitalised, liquidity moving, and confidence restored; after all, money is meaningless without confidence.
Draghi's arsenal could also include setting up something like the UK's Special Liquidity Scheme, the secret fund which allowed banks to swap illiquid stocks for more liquid ones. Europe's leaders have been running around like headless chickens for too long, and have been in total denial about the need to recapitalise their banks despite the most compelling evidence. Companies have been switching money into the ECB for safe-keeping because they are so worried about the solvency of their commercial banks, the banks themselves have been too scared to lend to each other, hedge funds have been taking money out of prime brokers, credit-default swap spreads at both Morgan Stanley and Goldman Sachs are back up at 2008 levels, and European banks have been frozen out of the US money markets. Meanwhile, Dexia, the Franco-Belgian bank which was bailed out three years ago, is being rescued again.
The two leaders who had the piston to make those decisions – France's Nicolas Sarkozy and Germany's Angela Merkel – have been more worried about their electoral chances than the well-being of the eurozone. At last they have woken up to the need, but they are coming to blows over how to resolve it – Sarkozy wants the banks recapitalised by the European Financial Stability Facility (EFSF) – the rescue fund established last year – but Merkel argues the EFSF should only be a last resort after the banks have tapped their own financial markets, or their governments. Merkel is right, and she's also right to stick to her guns on this one.
Europe's banks may need more than €140bn ($187bn) of capital. As Huw van Steenis of Morgan Stanley says: "Banks in core Europe need to be recession proofed and banks in the periphery depression proofed." Nicely put. That means recapitalising banks in core European countries to an 8 per cent core Tier 1 capital level and to 12 per cent in countries such as Greece, Ireland and Portugal, after applying European Banking Authority stress tests, and a 50 per cent write-down on sovereign Greek debt.
So Draghi's first target must be to get a Tarp-style bailout in place as swiftly as possible, certainly ahead of the G20 meeting in Cannes next month. Draghi is said to get on well with Merkel and Sarkozy and he must, quite simply, twist their arms behind closed doors. Then interest rates must be cut to stimulate growth in the eurozone.
Perhaps most delicate of all, Draghi and the ECB need to agree on how deeply Greece's private debt is restructured – key to any new package being designed. We also need to know what role the ECB plays in any overall rescue plan and to what extent a firewall is built around Italy and Spain to contain the contagion. And then, of course, Greece must be allowed to default in an orderly manner, to escape from this terrible straitjacket which is causing bloodshed on the streets. It's a high-stakes game and Draghi must be brave enough to live up to his name – and start breathing some fire.
'Stay hungry, stay foolish': Steve Jobs has left far more than Apple as his legacy
If you really want to understand the genius of Steve Jobs, you should catch him on YouTube giving his commencement address at Stanford University in June 2005, a year or so after he'd been diagnosed with pancreatic cancer. As he says, the ceremony is the nearest he ever got to graduation, as he dropped out of Reed College after six months, partly because his parents were struggling to pay the fees, but also because he was studying subjects he didn't love. It's also the nearest any of us will get to learning more about the man who was as obsessive about his private life as he was proud of Apple's public one.
So instead of going to boring classes, Jobs went off to Reed's calligraphy courses, learning how to draw and design typefaces while saving money by sleeping on a friend's floor and returning Coke bottles for five cents. He went on to start Apple in his parents' garage. The practical application of his calligraphy came only 10 years later when designing the first Macintosh computer and using, for the first time ever, multiple typefaces and proportionally spaced fonts. If he hadn't dropped out, he would never have come across the fonts.
I'm not going to go through all the other examples Jobs talks about – being sacked from Apple! – of how his life developed. But what it illustrates is this: connecting the dots of your life – and seeing where they lead – only comes later.
There's a big message here for businesspeople the world over, and one that applies to Apple, too. For now, it's understandable that Tim Cook, the new chief executive, is talking about the strength of Jobs' legacy; the four-year stock of new products, such as iTV, that he'd planned. (No doubt, they are being careful as they don't want to scare shareholders too much.) But it would be dangerous to live in his shadow; they need to make their own dots. As Jobs puts it: "Stay hungry. Stay foolish." Cook should listen again to the speech, as should all today's teenagers as they imagine their own futures.
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