Mario Draghi, Moral Suasion and Euro Zone Banks

It’s fitting that it is an Italian who has been charged with reshaping the landscape of the European banking system. The first financial institutions came into being among the rolling Tuscan hills, and the most high-profile casualty of the recent ECB stress tests was the world’s oldest bank, Banca Monte dei Paschi di Siena.

Mario Draghi, president of the European Central Bank, has shown remarkable single-mindedness in his determination, as he famously phrased it in a 2012 speech, to do “whatever it takes” to preserve the euro. Necessarily, this ambition has centered upon scouring the balance sheets of the euro zone’s banks. Within five weeks of his appointment as president in 2011, Draghi had implemented long-term refinancing operations (LTROs), the loan programs that sought to end the negative feedback loop between euro zone sovereigns and banks.

With the first part of his mission accomplished — European sovereigns are no longer being dragged down by their wayward banks — Draghi has now embarked on the second phase of the lengthy, and often painful, process of resuscitating the continent’s moribund financial system. “It is like a wound that needs to be disinfected immediately,” he said in a recent interview. “Although there may be some more loss of blood, once it has been properly taken care of the illness will disappear. The banks will return to lending in a much more robust position.”

One of the criticisms of the twoLTRO programs这发生在2011年底和2012年初的是，超过1万亿欧元（1.2万亿美元）的额外达到了更广泛的欧洲经济，银行在他们的资产负债表上没有增加现金而不是增加他们的欧洲经济贷款。既然尘埃已经开始定居在长期的欧洲央行压力测试中，德拉奇发起了一系列新的措施 - TLTRO（“T”代表“目标”）和ABS（资产支持证券）计划。前者是一种更具战略性的努力，以确保流动性通过银行向欧洲公司提供;后者是在银行资产负债表上购买ABS资产的任务。这些措施对德拉基对新经济型欧元区的愿景有着核心重要性。

这些最新的干预措施专门用于刺激欧洲通货膨胀。在多年来倾听德拉基的演讲时，欧元区日本风格通货紧缩的可能性一次又一次地出现在最糟糕的所有结果中。当他在6月宣布TLTRO和ABS计划时，Draghi表示，他们旨在获得通货膨胀的预期，他在10月2日新闻发布会上重申了四次。

The current low-inflation environment is threatening to move into a more drastic phase, with seven countries (including Italy and Greece) already in deflation and the overall rate for the 18-nation area sitting at a paltry 0.3 percent. The LTRO and ABS programs are desperately needed, and although an acronym-weary market has been focused more on the stress test results, these measures are arguably much more important and should provide a way out of the deflationary hole into which much of Europe has fallen.

We at GLG have recently moved overweight in European banks in both our European and global portfolios. Our change of heart (we had been underweight for the vast majority of the past eight years) has been prompted by the determination and logic we find in Draghi’s approach to addressing the problems facing the European financial system. We believe that the market has underestimated the potential size and impact of the ABS program in particular. These latest interventions will drive a substantial improvement in European banks’ overall profitability, and their return on equity specifically. Considering that the market seems to have given up on European banks (and on broader prospects of European growth), we find outstanding value in the sector, which is trading at book value.

Although we are in a minority, we also believe that the TLTRO and ABS programs will have a positive impact on bank lending. The counterargument is simple: There is no demand. Although this has been true in the past, we think demand for loans is now emerging among European corporations. The ECB’s own lending survey has shown positive net demand for credit in the past three quarters. The road to European recovery will be a rocky one, but we believe that (most) banks have already taken (most of) the pain and that inflation will, eventually, return.

推翻点是Mario Draghi是为了提高通胀预期的使命，他似乎愿意做任何事情来实现这一目标。在通常看起来匿名和摘要的金融市场中，它是一个单个个人的良好的例子，其具有与连贯性，令人信服的愿景的真正差异。•

Ben Funnell.is lead portfolio manager of the GLG Euro Equity and Global Equity strategies and of the GLG Balanced Managed strategy.