Draghi Fails to Find Clarity in ECB Communication
European Central Bank President Mario Draghi is struggling to find the right balance between saying too much and nothing at all.
Draghi won praise for his candor when he took the helm of the ECB seven months ago. Since then, he has kept investors guessing on three key Greek initiatives and confused some of them on the outlook for ECB bond purchases, whipsawing the euro and Italian and Spanish bonds. Economists from Nomura International Plc to ING Group NV say Draghi’s communication is exacerbating market turmoil.
“Since the first press conference when Draghi came in with a very confident style, it has basically been downhill on the communication front,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “Clearly the communication has sometimes created the wrong impression, and that makes markets that bit more volatile.”
Draghi took the reins of the world’s second-most important central bank in the middle of its biggest crisis, with the future of Europe’s common currency at stake. As concerns about the creditworthiness of euro-area nations drive up borrowing costs and force the ECB ever further into uncharted territory, Draghi must balance the need for transparency against the risk of spooking financial markets.
Openness and transparency guide the ECB’s communication activities, a spokeswoman for the Frankfurt-based central bank said. According to its website, the ECB’s transparency goal is to give the public and markets “all relevant information” in an “open, clear and timely manner.”
“The communication strategy has to be set against the difficult framework of the monetary union,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London, which manages about $18 billion. “But it’s true they’ve added to volatility. At times they could have been more transparent.”
Draghi, 64, surprised observers with his directness on debut as ECB president when he unexpectedly cut interest rates on Nov. 3 and said the euro area was headed for recession, sending the euro lower.
“He must be the first ECB president to utter the word ‘recession’ before it has actually happened,” Julian Callow, chief European economist at Barclays Plc in London, said at the time.
A month later, Draghi confused markets for the first time. Speaking to the European Parliament, he appeared to suggest the ECB would ramp up its government bond purchases if European leaders agreed on the then-novel idea of a fiscal compact.
“A new fiscal compact” is “definitely the most important element to start restoring credibility,” Draghi, a former Bank of Italy governor, said on Dec. 1. “Other elements might follow, but the sequencing matters.”
In anticipation of more ECB market intervention, Italy’s 10-year bond yield fell 37 basis points to 6.65 percent. A week later, the yield rose 44 basis point and the euro fell when Draghi downplayed the bond-purchase speculation, saying he was “surprised” at how his comments were taken.
“It was undisciplined communication,” said Kounis, a former U.K. Treasury official. “Clearly the communication has sometimes created the wrong impression,” leaving markets “expecting things that don’t materialize.”
Under Draghi, the ECB has also delayed or avoided announcing three initiatives this year on Greece, the country at the epicenter of the debt crisis, allowing leaked news to hang unexplained in markets.
In March, it didn’t announce that the Greek bonds it bought in its asset-purchase program would be exempt from a debt restructuring that cost private investors 100 billion euros ($126 billion). As Bloomberg News and other media broke the news, the euro and Italian and Spanish bonds rose because it fueled speculation that Greece was closer to getting a second bailout.
“This is one of the things people were concerned about with the Draghi presidency,” said James Nixon, chief European economist at Societe Generale SA in London. “There was the concern that he’s a backroom operator, keen to stitch up consensus behind closed doors. But what the world sees is merely a process of smoke and mirrors.”
Draghi didn’t publicly acknowledge the ECB’s exemption until three weeks later. Strategists at UBS AG, ING and other banks said the move could subordinate investors’ rights.
Vow of Silence
A similar vow of silence presided over exempting the Greek bonds held by euro-area national central banks for investment purposes, which Draghi helped negotiate. The news was broken by Bloomberg in February. The ECB has never disclosed how much Greek debt it or the 17 central banks of the Eurosystem hold.
In May, the ECB decided against announcing that it was moving some Greek banks off centralized funding and shifting them to secretive, country-specific lending arrangements, known as ELA, until they were recapitalized.
The euro fell to a four-month low after the news was reported by a Dutch newspaper on the morning of May 16. The ECB confirmed it in an e-mail at 6:46 p.m. that day.
“When you say nothing, people will be second-guessing what’s going on and that creates uncertainty in the market,” said Jens Sondergaard, senior European economist at Nomura in London. “Investors in a world with uncertainty start asking for risk premiums.”
Carsten Brzeski, senior European economist at ING in Brussels, said the ECB seems to have been “overwhelmed” by the demands of the debt crisis and pushed to its limits. “That’s how communication mistakes happen, and that has added to uncertainty in financial markets,” he said.
Draghi is not the only top central banker to have experienced teething problems.
Federal Reserve Chairman Ben S. Bernanke also stumbled shortly after taking office in 2006 when he told a CNBC reporter at a Washington dinner that investors had misinterpreted his remarks to Congress that suggested he was done raising rates. Bonds tumbled when CNBC reported the conversation and Bernanke later said the incident was a “lapse in judgment.”
His predecessor Alan Greenspan had a similar communications slip shortly after taking the reins in 1987, suggesting in an appearance on ABC’s “This Week With David Brinkley” program that inflation could become a problem. Bond yields rose and stocks fell in response, and Greenspan never gave a television interview on the economy again while he was Fed chairman.
Central banks have struggled to balance the need for transparency with their preference to keep some policy matters secret since the global financial crisis started five years ago.
Last year, the Fed was forced to make disclosures on discount window borrowers during the financial crisis after the U.S. Supreme Court left intact lower court orders requiring the central bank to reveal documents requested by Bloomberg News under the Freedom of Information Act.
On June 14, a European court began hearing a lawsuit brought by Bloomberg seeking disclosure of ECB files that may show how Greece used derivatives to hide loans. Greece’s ballooning deficit sparked the euro debt crisis.
Draghi’s communication travails illustrate the enormity of his job, said Andrew Balls, London-based head of European portfolio management at Pacific Investment Management Co., which runs the world’s biggest bond fund.
“I wonder how anyone in Draghi’s position could not have communications problems,” he said. “The central bank is getting dragged into lots of complex issues, many of which it is deeply uncomfortable with.”
Some economists say Europe’s political impasse over how to solve the crisis and what to do about a possible Greek exit has left the ECB in a bind.
While the central bank’s silence on key issues is “frustrating,” it “can never be too overt about influencing the process,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd in London. “The ECB has a very tricky job of balancing what it wants to see happen on one hand and not being seen as too political on the other.”
The ECB may also oppose full transparency on issues such as emergency ELA lending because it could risk shattering confidence in individual institutions or entire banking systems, raising the specter of bank runs.
Charles Plosser, president of the Federal Reserve Bank of Philadelphia, has argued that central bank communication is most likely to backfire when it lacks clarity, not when policy makers say too much.
Transparency “makes policy more effective,” Plosser said in Eltville, Germany, on May 25. Furthermore, “transparency in communication makes the central bank more accountable, and that’s a good thing.”
Draghi at times uses a blunt approach. At his second press briefing on Dec. 8 last year, after the ECB had cut rates again and Draghi had hinted at further stimulus, he answered his first questioner like this:
“The answer to the first question is ‘no.’ The answer to the second question is ‘no.’ And the answer to the third question is ‘we never pre-commit.’ So, it is two ‘no’s’ and one ‘never pre-commit.’”
While drawing laughter, the answer in fact revealed the significant news that the ECB had no intention of stepping up bond purchases and that some council members had voted against a rate reduction.
Christoph Kind, head of asset allocation at Frankfurt Trust, which manages about $20 billion, said he’s not unhappy with ECB communication.
Still, “I always hold my breath a bit when Draghi speaks, waiting for the odd faux pas,” said Kind. “In some respects he’s flippant, and in other instances he talks too much.”
Former ECB president Jean-Claude Trichet “was more of a statesman,” Kind said.
Draghi faces inevitable comparisons with Trichet, who piloted the ECB from 2003 to 2011 and developed a frequently- repeated set of phrases that markets learned to interpret. By contrast, Draghi has joked about his communication skills.
Asked last week whether he was wrong when he said in March that the worst of the debt crisis was over, Draghi gave some of his reasons for making the remark and said the full quote included a warning of serious downside risks.
“So, I mean, I’m trying to rationalize what I said, and I hope I’ve been, I guess, 50 percent convincing.”
To contact the editor responsible for this story: Craig Stirling at firstname.lastname@example.org
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