Op-Ed: Draghi didn’t just say ‘whatever it takes’

1

These are unprecedented times. Our lives as we know them have been upended: the comforts of routine squarely thrown out of the window and replaced with a combination of anxiety and dread.

The coronavirus pandemic of 2020 is a black swan that no one saw coming (though we should have been better equipped) and has unleashed a health crisis the world has not seen in a hundred years, as well as a labor crisis, an economic crisis, a credit crisis and a liquidity crisis.

“Everything we have written about in the last five years is now happening at the same bloody time!” TS Lombard Macro Analyst Dario Perkins tweeted in disbelief.

Financial markets, central banks and policymakers have been working as if on fast-forward mode the last couple of weeks. As new Bank of England Governor Andrew Bailey told the press last week after another round of surprise monetary easing: the Bank of England has only ever had four inter-meeting policy decisions – two of them in the last week alone.

Globally, central banks have been furiously cutting rates to record lows, expanding balance sheets and swap lines, and offering more generous funding terms to banks.

Governments have also started coming out with sizable COVID-19 response packages. This has prompted analysts and market watchers around the world to comment that policymakers do seem intent on doing “whatever it takes” – three words epitomized by the former European Central Bank (ECB) President Mario Draghi at the peak of the 2012 sovereign debt crisis.

Those three words have become an adjective ascribed to most of the initiatives that have been presented in the last fortnight. Even Germany has abolished its iron clad dedication to a “schwarze Null” – or balanced – budget and has unleashed a massive stimulus plan which will see its deficit rise to almost 5% of gross domestic product, according to Unicredit. That’s Germany doing “whatever it takes”.

Market participants should remember, though, that Draghi didn’t just utter the phrase. In fact, what he said was: “within our mandate, the ECB is ready to do whatever it take to preserve the euro. And believe me, it will be enough.”

The second part of this statement is just as important as the first. Why? Because markets DID believe him. They believed the ECB would be true to their word and would step in to intervene and avoid fragmentation in the market. So it worked.

The key pillar here was: trust.

The stakes this time around are much higher. People’s lives and livelihoods are at risk. The ILO last week estimated that up to 25 million jobs could be lost globally as a result of the coronavirus outbreak, not to count the number of businesses that will go under without a lifeline in the form of guarantees, interest-free loans or tax relief.

The world will eventually get through this pandemic, but now is the time we need to be able to trust policymakers to, well, I’m going to say it again, do whatever it takes to minimize the human and economic loss. We have to believe that their actions will be enough.