Draghi Euro humbles thought leaders seeing end of Union

Since July 26, when Draghi said he would do “whatever it takes” to save the 17-nation euro, the currency has appreciated versus each of its 16 major counterparts tracked by Bloomberg. The cost to protect against a default on government debt in western Europe tumbled to a 15-month low and confidence in the region’s banking system is improving, with bank stocks rallying 33 per cent since June 1, exceeding the 18 per cent gain in the Stoxx Europe 600 Index. While former ECB President Jean-Claude Trichet kept the central bank from propping up debt-laden governments by limiting purchases of their securities as the almost three-year crisis deepened, Draghi has done the opposite since he took over in November. His decisions are placing everyone from former International Monetary Fund (MERKX) chief economist Kenneth Rogoff to fund manager Axel Merk on the wrong side of the market.

“It has been a game changer, and Draghi has done the heavy lifting,” Merk, president and founder of Merk Investments LLC in Palo Alto, California, said in a September 13 telephone interview. 

 

His US$526 million Merk Hard Currency Fund has jumped 3.38 per cent in the past month, beating 92 per cent of its peers, according to data compiled by Bloomberg. Draghi, 65, has shown a greater willingness than Trichet to use the ECB’s balance sheet to aid Spain and Italy, and he relaxed his predecessor’s insistence that senior bondholders at crippled banks shouldn’t suffer losses in bailouts. Merk, who said he was “very negative” on the euro earlier this year because of what he called the dysfunctional process in resolving Europe’s crisis, has turned into a buyer. “The euro has much higher to go from here, though it’s not out of the woods yet,” he said. Chances of a breakup of the monetary union by the end of 2013 fell to 50 per cent from more than 60 per cent in late July, according to Dublin-based Intrade.com data, after Draghi gave details last week of a plan announced in August to buy debt of members, including Spain and Italy. The euro soared to a four-month high of US$1.3169 on September 14, before trading at US$1.3139 as of 10:20 am in New York. (Bloomberg)