MARIO DRAGHI, NEW ITALIAN PM: ITALY'S CHANCE FOR RECOVERY? - Wealth Monaco
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MARCH 17, 2021 IUMFS RESEARCH TEAM
MARIO DRAGHI, NEW ITALIAN PM:
ITALY'S CHANCE FOR RECOVERY?
By Andrea Aguirre & Ludovico Frigo
TABLE OF CONTENTS Abstract
Following the resignation from former Prime Minister Giuseppe
ITALY'S OVERVIEW Conte on February 3rd and after a week of talks and negotiations
with all the political forces, Mario Draghi accepted the proposal
from the President of Italy, Sergio Mattarella, to be appointed as the
30th Prime Minister of Italy at the head of the 67th Italian
BACKGROUND ON government since 1946.
MARIO DRAGHI Former president of the Bank of Italy and of the European Central
Bank, Mario Draghi has a brilliant record and is mainly known for
his ability to work under pressure- the Euro crisis context in 2012
ITALY'S RECOVERY PLAN being one.
This time, “Super Mario”- the nickname that several media
platforms associated him with - will have to take up another
relevant challenge: coming to the rescue of Italy. His native country
"DRAGHI EFFECT" ON has been facing significant economic and political difficulties since
FINANCIAL MARKETS the late 2000s and has seen its position aggravating due to the
COVID-19 crisis.
Will Mario Draghi succeed in his first-ever
government position and lead Italy towards
an economic recovery?
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MARCH 17, 2021 IUMFS RESEARCH TEAM
Italy's overview
Italy’s economy, the third largest in the euro zone, Nevertheless, Italy’s next government is expected
has been anemic for a long time. In the past, to change the economic situation of the country.
Italy’s economy was based on transforming raw On February, Prime Minister Giuseppe Conte
materials into products to be sold abroad just like resigned after he lost his governing majority in
many other European countries. Based on the Senate due to poor covid-19 pandemic
industry classification, the Italy economy is management and attendant economic recession.
segmented into automobile, food and beverage, The named Prime Minister is Mario Draghi,
aviation and others. With globalization, the known for his remarkable experiences which
opportunity for Italian goods to be successful in seems to be exactly what Italy needs.
world markets was reduced since developing
countries gained larger stakes in exporting goods Background
to areas in Europe. Nevertheless, the country did
not count with a workable and stable political
on Mario Draghi
coalition, which can be considered as the roof of After graduating in Economics from La Sapienza
the problems. University in Rome, Mario Draghi received a
Italy struggles between two power groups: Ph.D. in Economics from the Massachusetts
Eurosceptic populists and pro-EU lawmakers. The Institute of Technology in 1976. Later, he taught
radical right populist parties attempt to leave the in several universities and worked for the World
European Union or re-found it to completely Bank in the 1980s. Among the significant job
change it, while the left-wing populist parties positions, Draghi was appointed Director-General
present a constructive discourse. In Italy, the 5 of the Italian Treasury from 1991 to 2001. During
Star Movement was the most voted political this period, he focused on reducing Italy’s public
option in the 2018 elections. The party was born debt through stabilizing interest rates and
in 2009 as an "anti-political movement", but the currency exchange rates. This was a crucial step
reality is that after entering in Parliament after taken to make the Italian economy ready to enter
the February 2013 elections, it became a political the European monetary union of 1999. Among
party. other positions, Draghi was named President of
The movement attributes all responsibility about the Bank of Italy in December 29, 2005. He
what happens in Europe to the European adopted a strict monetary policy for the country
Parliament since they are responsible for the to keep up with the challenges of the euro
mismanagement of issues such as the economic currency project. In November 2011, Mario
crisis. This movement generated a strong Draghi became the president of the European
disaffection among citizens concerning the Central Bank.
European political project.
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Euro crisis
When Mario Draghi stepped in as president of the Fiscal positions and debt levels of these
ECB, the Eurozone financial crisis was already European countries were unsustainable and
well underway, to the point that Greece was close looked particular alarming to the eyes of many
to giving up the currency. political and economic entities, and to investors.
The European debt crisis took place in the (BBC, 2019) As a consequence, lenders started to
European Union starting from late 2009. In the demand higher interest rates to PIIGS
wake of the 2008 Great Recession, many governments, their borrowing costs were
governments were facing increasing structural soaring to unsustainable levels and this
deficits and worrying debt levels. contributed to worsen the ability of the countries
This situation was particularly exacerbated by the to repay their debt and hence, jeopardizing the
interest rate system that had been set up by the whole system.
ECB at the time, incentivizing Southern European
countries to repeatedly borrow from Northern
European countries at particularly low interest
rate levels. (Investopedia)
In that context, the acronym PIIGS emerged,
designing Portugal, Ireland, Italy, Greece and
Spain as European member states that would not
have been capable of repaying their government
debt without the external aid from a financial
institution.
As shown by the graph (ECB), government
securities yield skyrocketed in late 2010 all above
6% for PIIGS, indicating that financial
The previous graph (stats.areppim.com) displays institutions were having serious doubts
the evolution of the PIIGS’ debt-to-GDP ratio regarding the creditworthiness of those
between 2005 and 2010. A rapid and alarming countries. Pressure on the markets was severe,
growth causing the ratio to reach 142% for the European Union could have potentially
Greece, 119% for Italy, 96% for Ireland and 83% survived a Greek exit from the Eurozone, but in
for Portugal, figures well above the European the case of Italy or Spain, this could have
Union average set at 79.6% in 2010. (Eurostat) marked an end to the Euro. (BBC, 2019)
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MARCH 17, 2021 IUMFS RESEARCH TEAM
This was the extremely challenging context in Following that historical date, Mario Draghi
which the European Union was stagnating when pulled the trigger on a set of expansionary
Mario Draghi took office as a successor of Jean- monetary policy measures known as quantitative
Claude Trichet at the head of the ECB. easing, a form of monetary policy frequently
Starting from December 2011, the ECB began a undergone by the Federal Reserve. (KfW
three-year loan program directed at EU banks Research) The ECB rescue plan that carried the
which amounted for €489 billion, with the aim of name of “outright monetary transactions”
easing the crisis. (OMTs) consisted in buying the bonds and debts
of the PIIGS governments to alleviate the fiscal
pressure of these countries. As a result, these
"Whatever it takes"
measures led to a steady decline in the yield of
Despite the financial aid from the ECB, the PIIGS’ securities as shown by the following
situation did not seem to improve and, on the graph and hence making their debt more
contrary, renewed fears concerning sovereign manageable.
debts and the Eurozone crisis in 2012 were
marking the beginning of Mario Draghi’s
mandate.
It was probably the most difficult moment that
the EU had ever faced, but the president knew
that the ECB could not give up. Instead, he
decided to make it clear to the entire world that
he would have done his best to preserve the
Eurozone, creating a general wave of optimism.
July 26, 2012 is definitely a date that the
European Union and Mario Draghi will hardly These bold moves from Mario Draghi and the
forget. During the Global Investment Conference ECB created the conditions for ending the
in London, he delivered a speech that highlighted sovereign debt crisis and for building the
the strong commitment of the ECB to save foundations of a continuous eurozone economic
Europe and the euro area. Throughout the growth starting from the second quarter of 2013.
discussion, he stated that “Within our mandate, (BBC, 2019)
the ECB is ready to do whatever it takes to
preserve the euro. And believe me, it will be
enough”. (ecb.europa.eu, 2012)
This statement received international acclaim
and served as turning point in the European
sovereign debt crisis.
Another issue that is still present in the eurozone
is inflation.
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MARCH 17, 2021 IUMFS RESEARCH TEAM
Inflation and
Draghi’s late mandate
When the ECB was a new central bank, it However, any economy needs banks to be
operated in a very heterogeneous monetary union, commercially viable if they are to provide the
which made it essential to establish inflation credit that business and consumers need. There
credibility. Establishing a commitment to is another view which mentions that interest
controlling inflation was seen as critical to rates and QE cannot fix the problem. Mr. Draghi,
cement lower inflation expectations across the his successor Christine Lagarde, and many
euro area. For this, in 1998, the ECB’s objective others have suggested that governments need to
for price stability was set to be inflation with do more. They argue that those countries that
range of 0 to 2% over the medium term. have room to spend more should do so to provide
the eurozone economy with some stimulus, and
in particular with the current COVID-19 crisis.
Italy's
recovery plan
The new challenge of “Super Mario” now
consists in steering Italy’s recovery from the
coronavirus pandemic. After years of economic
and political malaise, Draghi will have to take up
The ECB under Mr. Draghi's leadership took some the daunting task of managing and allocating the
dramatic steps to tackle the problem. There has €209 billions that are destined to Italy as part of
been quantitative easing, buying financial assets, the Recovery Plan for Europe-€81.4 billion
mainly government bonds, with newly created grants and €127.4 billion low-interest loans.
money. In January 2015, the ECB initiated the (ilsole24ore, 2020)
quantitative easing through the asset-backed Finalizing the plan on how these European
securities purchase program (ABSPP) and the resources will be spent could define the tenure of
covered bond purchase program (CBPP3). The the former ECB president, and could mark a
combined monthly purchases amounted to €60 turnaround in Italian politics as the previous
billion, and they were carried out until September government failed at achieving that task.
2016, until the Governing Council saw a sustained Coupled with NextGenerationEU, the Recovery
adjustment in the path of inflation (ECB, 2015). Plan amounts for €1.8 trillion in total and will be
Despite efforts to enhance inflation levels, it the largest stimulus package to be ever financed
remains below the ECB’s target and bank’s from the European Union in 28 years of history.
negative interest rate policy is also criticized.
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MARCH 17, 2021 IUMFS RESEARCH TEAM
Frequently associated to the post-WWII Marshall In addition to that, the Italian Prime Minister is
plan, it will consist in low-interest loans and facing tight deadlines since he will have to
grants with the aim of helping to rebuild a post- present the Italian National Recovery and
COVID-19-Europe which will be greener, more Resilience Plan (NRRP) to the European
digital and more resilient (ec.europa.eu 2021) Commission by April 30th in order to have
The financial framework of this relief package access to the €209 billion funds.
will be diluted over the 2021-2027 timeframe and This will represent a major challenge for the
will be constituted as follows. new-born Italian government, but Mario Draghi
is aware of how crucial it is to define a precise,
long-term strategy on how that money will be
allocated as it is likely to shape the future of his
native country for years to come.
Few days after his appointing, in the beginning
of February, the former ECB president stated:
“We have at our disposition the extraordinary
resources of the European Union. We have the
opportunity to do a lot for our country, with a
careful eye on the future generation."
A clear, direct message that elicits hope for
future recovery, economic growth and rise in
employment levels, and at the same highlights
the importance of focusing on Italian’s youth,
often left behind.
"Draghi effect"
on financial markets
The Recovery Plan pays particular attention to
six major elements of agreement that are
Bond market
digitalisation, green revolution and ecological Government securities 10-years yields reflect
transition, infrastructures for sustainable investors’ confidence in a given country. When a
mobility, education and research, inclusion and country is expected to perform particularly well,
cohesion and healthcare. (mef.gov.it) as a result of the risk-return tradeoff, 10-years
These are the strict guidelines that the plan that yields generally fall and on the contrary, when
Mario Draghi will have to deliver is expected to investors lose confidence in a country’s future
address. performances, 10-years yields generally increase.
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MARCH 17, 2021 IUMFS RESEARCH TEAM
Government securities 10-years yields reflect Starting from February 3rd, the day when the
investors’ confidence in a given country. When a President of Italy Sergio Mattarella asked Mario
country is expected to perform particularly well, Draghi to start forming a new government, the
as a result of the risk-return tradeoff, 10-years spread started to drop reaching 89.290 bp on
yields generally fall and on the contrary, when February 16th, few days after that Mario Draghi
investors lose confidence in a country’s future had been appointed as 30th Prime Minister of
performances, 10-years yields generally increase. Italy.
The Italian government bonds are the BTPs
“Buono del Tesoro poliennale” and like for the
majority of the European countries, their
performance is benchmarked to the German
Bunds, since Germany is the European country
with the strongest financial position.
In the case of Italy, the spread BTP-Bund has
always been floating in the range 100-300 basis
points (Borsa Italiana), reflecting the significant
financial disparity between the two countries.
(N.B. Italy and Germany’s sovereign ratings Despite BTP-Bund spread levels went back to
respectively are BBB- and AAA) over 100 bp in the recent days, investors
generally agree that this was caused by a general
fear about the return of inflation and the rise in
US T-bonds’ yield following the speeches from
Fed Chair Powell. Hence, the spread is expected to
float below 100 bp in the upcoming months
thanks to the Draghi effect.
Stock market
Financials are the biggest sector among Italian
large and mid-cap firms and consumer
However, in the past month and for the first time discretionary stocks make up the third-largest
since 2015, the spread has broken the 100 bp sector. The FTSE MIB, Italy’s main stock market
“resistance”, this being essentially due to what index, has risen about 7% from a low on January
investors and banks referred to as “Draghi 29 on the back of Draghi’s appointment, and
effect”. experts believe there is room for potential growth.
On February 2nd, the spread BTP-Bund was at Mislav Matejka, head of global and European
116.220 bp. equity strategy at JPMorgan, said that Draghi’s
policies are “bullish for the Italian equity market,
through
.
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MARCH 17, 2021 IUMFS RESEARCH TEAM
tighter peripheral spreads, greater policy “The economy doesn’t contract, it doesn’t grow.
credibility and the bottoming out in activity Italy is a country that is weak, that is old, where
momentum, helped by the strong fiscal support.” there is no investment in new ideas.” Still, after
Morgan Stanley analysts predicted MSCI’s Italy reviewing Mario Draghi’s background,
index would outperform MSCI EMU by 10-15% led experience and understanding of the economy,
by banks. Indeed, shares of Italy’s banks were we strongly believe that he is the most suited
among the biggest winners with Draghi’s new figure to carry on Italy throughout these
government. Intesa Sanpaolo surged 5.83% on the turbulent times. His success as ECB president,
Milan stock exchange, Banco BPM was up 4.55%, especially his key role in overcoming the
and UniCredt climbed 4.72% (Market Insider, European sovereign debt crisis of 2010-12, is a
2021). On the other hand, improving perceptions signal to other countries and to financial
around Italy could dovetail with the expected markets that Italy is in the safest possible hands.
economic rebound from the COVID-19 pandemic,
Morgan Stanley analysts said, adding that a more
than 30% outperformance was “not implausible”.
Indeed, the appointing of the former ECB
president was positively perceived by the financial
system that believes that Mario Draghi is the right
person to allocate the money of the Italian
Recovery Plan and to carry out Italy from the
economic crisis it has been stagnating in for more
than a decade.
Conclusion
Mario Draghi’s acceptance of the proposal from
the president of Italy has led the country to a new
wave of opportunities and optimism. However, he
will have to take up the several challenges from
the way Italy has structured its economy
throughout the past decades.
This was highlighted by Nicola Borri, a finance
professor at Luiss University in Rome, during an
interview with the CNBC.
.
PAGE 8MARCH 17, 2021 IUMFS RESEARCH TEAM
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