Draghi’s ECB management: the leaked Geithner files

Draghi’s ECB management: the leaked Geithner files 

 

Peter Spiegel | Nov 11 15:35 | 31 comments | Share      

..."Geithner: I remember coming to the dinner and I’m looking at my Blackberry. It was a fucking disaster in Europe. French bank stocks were down 7 or 8 per cent. That was a big deal. For me it was like, you know, you were having a classic complete carnage because of people [who] were saying: crisis in Greece, who’s exposed to Greece?….
I said at that dinner, that meeting, you know, because the Europeans came into that meeting basically saying: “We’re going to teach the Greeks a lesson. They are really terrible. They lied to us. They suck and they were profligate and took advantage of the whole basic thing and we’re going to crush them,” was their basic attitude, all of them….
But the main thing is I remember saying to these guys: “You can put your foot on the neck of those guys if that’s what you want to do. But you’ve got to make sure that you send a countervailing signal of reassurance to Europe and the world that you’re going to hold the thing together and not let it go. [You’re] going to protect the rest of the place.” I just made very clear to them right then. You hear this blood-curdling moral hazard-y stuff from them, and I said: “Well, that’s fine. If you want to be tough on them, that’s fine, but you have to make sure you counteract that with a bit more credible reassurance that you’re going to not allow the crisis to spread beyond Greece and that’s going to require, you’ve got to make sure you’re putting enough care and effort into building that capacity to make that commitment credible as you are to teaching the Greeks a lesson….”
Interviewer: I mean was that, did you have this kind of foreboding like: oh my god, these guys are just going to…?''
At a time when Mario Draghi’s style of running the European Central Bank is under question – there’s reportedly been grumbling he’s setting monetary policy in off-the-cuff public remarks rather than in consultation with the bank’s board members – it is easy to forget that Draghi’s most famous act as ECB chief was also an unscripted public utterance: “whatever it takes”.
The now-famous 2012 remark, which is widely credited with ending the hair-on-fire phase of the eurozone crisis by hinting the ECB would use its printing presses to buy up sovereign debt of besieged governments, has long been viewed as a masterstroke of market management, since the ECB has yet to spend a cent on such bond purchases.
But as the FT and other news organisations have reported, many on the ECB governing council were taken aback by the remarks because the issue wasn’t discussed more widely before Draghi declared it as ECB policy.
The Brussels Blog recently got its hands on yet more evidence that Draghi’s remarks – made at a conference in London in July 2012 – were inserted at the last minute without wider consultation: raw transcripts of discussions with Timothy Geithner, who was US treasury secretary at the time, about the eurozone crisis.
The 100 pages of transcripts we obtained are of interviews Geithner gave to assistants preparing his book, Stress Test: Reflections on Financial Crises, which was published in May. Many of the recollections also appear in the book, but Geithner provides more detail and more bluntness – including a fondness for the f-word – in the pages we obtained.
This is particularly the case for the “whatever it takes” speech. In his book, Geithner mentions the remark was impromptu. But in the transcript, Geithner reveals his source for that passage: Draghi himself, who told Geithner he had decided to insert the words into his address after meeting with London financiers who were convinced the eurozone was on the brink of implosion. Here’s the section of the transcript relating to Draghi’s speech:

Geithner: [T]hings deteriorated again dramatically in the summer which ultimately led to him saying in August, these things I would never write, but he off-the-cuff – he was in London at a meeting with a bunch of hedge funds and bankers. He was troubled by how direct they were in Europe, because at that point all the hedge fund community thought that Europe was coming to an end. I remember him telling me [about] this afterwards, he was just, he was alarmed by that and decided to add to his remarks, and off-the-cuff basically made a bunch of statements like ‘we’ll do whatever it takes’. Ridiculous.
Interviewer: This was just impromptu?
Geithner: Totally impromptu…. I went to see Draghi and Draghi at that point, he had no plan. He had made this sort of naked statement of this stuff. But they stumbled into it.

Similarly, Geithner’s account of a Group of Seven finance ministers’ meeting in the remote Canadian town of Iqaluit – the first time he met his German counterpart Wolfgang Schäuble – is far more colourful in the transcripts than it is in the book. The meeting was held in February 2010, just as panic over Greece’s restating of its accounts was beginning to grip the bond market. In his book, Geithner recalls there were calls for “Old Testament justice” at the meeting. But in the transcripts, he’s a bit more explicit:

Geithner: I remember coming to the dinner and I’m looking at my Blackberry. It was a fucking disaster in Europe. French bank stocks were down 7 or 8 per cent. That was a big deal. For me it was like, you know, you were having a classic complete carnage because of people [who] were saying: crisis in Greece, who’s exposed to Greece?….
Geithner: I remember coming to the dinner and I’m looking at my Blackberry. It was a fucking disaster in Europe. French bank stocks were down 7 or 8 per cent. That was a big deal. For me it was like, you know, you were having a classic complete carnage because of people [who] were saying: crisis in Greece, who’s exposed to Greece?….
I said at that dinner, that meeting, you know, because the Europeans came into that meeting basically saying: “We’re going to teach the Greeks a lesson. They are really terrible. They lied to us. They suck and they were profligate and took advantage of the whole basic thing and we’re going to crush them,” was their basic attitude, all of them….
But the main thing is I remember saying to these guys: “You can put your foot on the neck of those guys if that’s what you want to do. But you’ve got to make sure that you send a countervailing signal of reassurance to Europe and the world that you’re going to hold the thing together and not let it go. [You’re] going to protect the rest of the place.” I just made very clear to them right then. You hear this blood-curdling moral hazard-y stuff from them, and I said: “Well, that’s fine. If you want to be tough on them, that’s fine, but you have to make sure you counteract that with a bit more credible reassurance that you’re going to not allow the crisis to spread beyond Greece and that’s going to require, you’ve got to make sure you’re putting enough care and effort into building that capacity to make that commitment credible as you are to teaching the Greeks a lesson….”
Interviewer: I mean was that, did you have this kind of foreboding like: oh my god, these guys are just going to…?
ew of the crisis and the fact that France was suffering a fair amount of collateral damage, too, because Europe’s getting somewhat weak, he’s in election [campaigning]. He’s trying to figure out how to bridge this difference….

There’s a G20 meeting in France that Sarkozy hosts which was really incredibly interesting, fascinating thing for us and for the president and I’ll tell you just a few quick things in passing so we can come back to those things. The Europeans actually approach us softly, indirectly before the thing saying: “We basically want you to join us in forcing Berlusconi out.” They wanted us to basically say that we wouldn’t support IMF money or any further escalation for Italy if they needed it if Berlusconi was prime minister. It was cool, interesting. I said no….
But I really actually felt, I thought what Sarkozy and Merkel were doing was basically right which is: this wasn’t going to work. Germany, the German public were not going to support, like, a bigger financial firewall, more money for Europe, if Berlusconi was presiding over that country.

There are some other, less consequential revelations in the transcript, such as the fact Angela Merkel, the German chancellor, never wanted to meet Geithner. The two would exchange words when Geithner accompanied Obama in meetings with Merkel, but unlike Sarkozy – who would summon Geithner to the Elysée whenever he arrived in Paris – Merkel was not interested, ever when Lael Brainard, then the US treasury’s chief international affairs official, would put in an informal request:

Interviewer: And at this point were you talking to Merkel at all?
Geithner: No. Merkel would never speak to me. I never called Merkel directly. I would always be with meetings with her and the president, but she would never – and I went to Germany a couple of times. She would never see me. She was, I think she was quite respectful of me and she listened and engaged with me directly in those meetings, but when I went to Germany, [I] didn’t do it that often, a couple of times. I never like to ask to see a head of state. I find it, like, offensive. My general view is: they know I’m coming, if the finance minister wants me to see the head of state, and they decide to ask me to do it, I’ll do it, but I never wanted to ask. But usually Lael, who was a different approach to these kind of things, Lael would generally get somebody to ask on my behalf, and [Merkel] never wanted to see me. I would see Sarkozy or, you know, normally in those countries they would all want to see me.

A few other nuggets on major events and personalities:
On Wolfgang Schäuble:

Schäuble was the former interior minister who was shot by a terrorist in Germany, disabled by it, consigned to a wheelchair and had moments when he was hospitalised during that period of time, during the crisis, which was sort of consequential. But he’s like a really impressive, I really like the guy, even when we disagreed a lot on the substance and response. He’s a Europeanist, older than Merkel, was I think more powerful in his party, the CDU, than Merkel and they always had a very interesting relationship. Somebody [who’s] out in front of her…he’s a really interesting guy.

On Olli Rehn, then European Commissioner in charge of economic affairs:

Olli Rehn is the guy, the economic guy on the commission, who is always in the papers about this kind of stuff, who doesn’t have much authority, so [garbled] the commission. But he’s definitely a force for reason and an interesting guy and generally, I think, on the side of angels in this stuff.

On the infamous October 2010 “Deauville Declaration”, where Merkel and Sarkozy agreed that future bailouts could include forced losses or “haircuts” on eurozone bondholders – regarded as the decision which sparked a broader panic in European debt markets:

That was, like, [an] incredible miscalculation for damage. They had a summit in Deauville, France, where Sarkozy, in order to get Merkel to back off her “fiscal union” stuff, which was very hard for him politically because, you know, France in that [was] agreeing to come under the thumb of Germany on fiscal policy – at least that’s what the French politics was. He, Sarkozy, agrees to back Merkel on this haircut stuff….
I was on the Cape [Cod] for Thanksgiving and I remember doing a G7 call from the Cape and being in my little hotel room. And I basically, and Trichet did the same thing, I was, I’m sure I was rude and I said: basically, if you guys do that, you will, you know, all you will do is accelerate the run from Europe. No one will lend a dollar, a euro to a European government if they’re weak in that context because the fear will be, if they need money, you’ve got to force some restructuring, haircut [garbled]. It completely inverts the incentives you want to create. I was fucking apoplectic about it and I said it may be that you’re going to have to – I can’t remember how I said it – you may be, if you’re going to restructure Greece, but until you have the ability to in effect protect or guarantee the rest of Europe from the ensuing contagion, this is just [a] metaphor for our fall of ’08. You can’t do that….
At that point, Trichet was completely apoplectic about these guys, [and] said that you cannot afford to have all this loose haircut talk until you are in a better position to be able to guarantee and protect the rest of Europe from the contagion and the run of what happened.

On Maria Fekter, Austrian finance minister, and a meeting of EU finance ministers he attended in Poland in September 2011:

They invited me to go to a meeting of their Ecofin, which is their group of finance ministers, and central bankers in Poland in September. And they, the Austrian finance minister and a couple others – I think I’m very polite in the meeting. They asked me to come to the fucking meeting. I call them in advance and say: “You really sure you want me to come? It’s kind of a sensitive thing for me to come to your meeting.”
They turn to me in their meeting, they ask me for my views, my normal views which you’ll find boringly familiar at this point, and a bunch of their ministers go walk out afterwards and say: “Who’s Geithner to tell us what to do?” Very disparaging, like quite disrespectful from their peripheral ministers. And the fucking New York Times writes a story – I can’t remember who wrote the story – somebody at the Times wrote a story that I came home to see at that point, or maybe it was after that, just like a really brutal story: end of American influence, [garbled] lack of influence of American officials, using anecdotes of that meeting for that. That wasn’t so great.

On Ireland’s decision to guarantee all its banks in 2008:
Ireland, most people view in retrospect, was stupid to guarantee all their banks. They couldn’t afford it. They were eight times the size of their economy. Now it’s easy for us to say that. If they had haircut all their bondholders to the banks, then there probably would have been other forms of contagion. The rest of Europe maybe shouldn’t have guaranteed them, but the rest of Europe could afford to guarantee. The Irish couldn’t