Before ANC secretary-general Ace Magashule introduced the concept of “quantity easing” into the national discourse, life could be lonely for those who have an interest in such obscure things as sovereign bonds.
Monetary policy was definitely not a subject one brought up at a party. Most conversations would start with someone inquiring about what you did for a living. When you said journalism, the follow-up question would be what type of journalism. At the point where you mentioned sovereign bonds, the other person would either change the subject or politely make an excuse to find someone else to chat to.
[Mario Draghi] is due to leave in October, a month before Reserve Bank governor Lesetja Kganyago’s first term is due to end, and there is heated debate in European capitals about who should replace him.
There was a bit of a golden era around 2009/2010, when Greece slipped into a debt crisis that most people didn’t believe could afflict a developed European nation. Suddenly talk of default, the thing that only happened “over there” in Russia, Argentina or some African countries, was the thing.
Over the following years that crisis would spread throughout the euro area. As early as 2008 Ireland’s economy was experiencing the bursting of a property bubble, leading to the nationalisation of its biggest banks accompanied by an explosion in government debt, recession, rising unemployment and painful austerity.
When bond investors started to question the ability of Italy and Spain, the third- and fourth-biggest economies in the euro area, to repay their debts, it became clear what was at stake was more than just the fate of a couple of southern economies at the periphery of Europe. The collapse of the currency bloc, seen as one of the central pillars of the post-World War 2 integration and peace project, suddenly became a possibility.
Up to that point the European Central Bank (ECB) had pretty much behaved in a very orthodox manner. In fact, in 2011, led by a hawkish Frenchman, Jean-Claude Trichet, it hiked interest rates twice, first in April of that year, coming even as the crisis was picking up more victims, with Portugal forced to ask for a financial bailout.
Oil prices at two-and-a-half-year highs were a bigger concern to Trichet than the debt crisis that was slowly threatening to overwhelm Europe. He would move again two months later, with an uncompromising focus on the bank’s mandate to keep inflation close to, but below, 2%.
That was in contrast to what the Bank of England was doing. Then governor Mervyn King kept rates unchanged although inflation was running at more than twice the bank’s 2% target.
Fans of “quantitative” — rather than “quantity” — easing in SA may point out that inflation above 4% not only failed to deter King and his colleague from keeping rates at a record low, they were also printing money at the time via quantitative easing.
That’s because they saw the inflationary spike as temporary and were therefore unwilling to increase rates when the domestic economy was weak, reflecting the aggressive austerity measures of the Tory government at the time and a global picture that was being further clouded by the sovereign crisis eating up its neighbours.
So, this might have been used by Magashule and his fans as an example to demonstrate how central banks can use the discretion and flexibility built into their mandates.
Nobody at this stage ever suggested a change in the Bank of England’s mandate, and yet it was able to deviate without losing credibility with markets. Of course it would have been a different story if it had done that in response to noises from politicians.
Back in the eurozone, Trichet’s term would soon come to an end and he would be replaced by Mario Draghi, who hailed from the European periphery, Italy to be specific, one of the countries in the cross-hairs of the debt crisis.
Though the bond-buying programme started under Trichet, Draghi, whose first action as ECB chief in late 2011 was to undo his predecessor’s rate hikes, would take it to a different level.
Perhaps he will be most remembered for his 2012 speech in which he pledged to do “whatever it takes” to save the euro. In reality that included an expanded quantitative easing programme, negative interest rates and massive liquidity support for commercial banks.
He is due to leave in October, a month before Reserve Bank governor Lesetja Kganyago’s first term is due to end, and there is heated debate in European capitals about who should replace him.
The German candidate Jens Weidmann spent much of the crisis period placing himself in opposition to Draghi, so there is naturally a fear that if he or another German takes over, the era of “whatever it takes” might end and euro area bonds could once again be vulnerable to speculative attacks.
It’s also interesting to note that Draghi wasn’t always the favourite to replace Trichet in 2011. That honour fell to another German, Axel Weber, who was so disgusted with the ECB’s emerging non-conventional measures, he chose to quit.
So the person in charge, and how they interpret the job, has been a much more significant factor in the evolution of the ECB than its mandate. Perhaps the lesson here is how futile it is to have endless debates about our Bank’s mandate.
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