Will Empty Promises Fade?February 12, 2013 Posted by: Joe Morgan, CFA
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
Whatever it takes, my love
To put the lonely days behind us
- Michael Buble
A lover's statement of "whatever it takes" can be quite believable. But can a Central Banker make the assertion with the same credibility?
In August last year, European Central Bank chief Mario Draghi famously stated that he would do "whatever it takes" to support the euro. Since then, we've had nary a peep of super-negative news out of the region and the currency has risen nearly ten percent.
Equally important, though, is the fact the central bank hasn't really done anything to back up the famous promise. Instead, this has been a powerful demonstration of the power of perception. If speculators believe you will cause them pain, they will shy away.
But does any of this solve the real problems in Europe? Of course not.
Lately, two revelations have come to light that are again working against confidence in the region.
First, it has been alleged that Spanish Prime Minister Mariano Rajoy accepted illegal cash payments resulting from recent bailouts. Rajoy's efforts since coming to power 14 months ago have instilled some bit of confidence in market players. An ousting would put all of those gains at risk.
Second, former Italian PM Silvio Berlusconi is gaining support prior to parliamentary elections later this month, even as he stands criminal trial for sex with a minor and appeals a prison sentence for tax fraud. These are not the attributes that promote confidence in the bond markets.
Additionally, Greece remains in trouble and should they - or any other - country get booted from the currency union despite Mr. Draghi's promises, the sharks will circle and likely eventually sink the euro's grand experiment.Read More