Central bankers aren’t known for oratorical flourishes. It could be that the subject matter – think rates and reserve requirements – doesn’t lend itself to stirring speeches. Or it might be that bankers prefer opaqueness in their communications, playing their cards close to the vest in case pivots in policy are necessary. That said, 10 years ago, European Central Bank President Mario Draghi made global news – and one could argue, geo-political history – when he promised the ECB would do “whatever it takes” to hold the Eurozone together.
At the time, investors feared highly-indebted, economically-challenged European countries, including Italy and Greece, would be forced out of the Eurozone, leading to the fragmentation of an institution that was key to an unprecedented era of peace and cooperation for the continent. The thinking was strong Eurozone economies – including Germany – were unwilling to support weaker economies, or those weaker nations would exit the Euro so they could return to their legacy currencies and inflate away their debt. Investor concerns manifested in soaring bond yields and borrowing costs for Italy and other countries. In response, the ECB took interest rates below zero and injected more than half a trillion Euros into the banking system, eventually stabilizing economic and credit conditions on the continent, and keeping the Eurozone intact.
Today, bond yields have moved up across the Eurozone in response to historically high inflation and an ECB that is poised to raise rates for the first time in years. The ECB, like the Fed, faces the tricky task of tamping down inflation without putting Europe into a recession, a job made more difficult by the conflict in Ukraine. But we don’t think the Eurozone faces the existential risk of a decade ago and believe tighter spreads between bond yields of stronger and weaker members support that thinking, as 10-Year Italian debt is yielding 200 bps more than 10-Year German debt, compared to 470 bps when Mr. Draghi delivered his history-making speech in July 2012 (see chart). Europe, like the US, is working through a very difficult economic period. Both will make it through to the other side.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 1021-BCI-6/13/2022
Tim Holland, CFA