Since Mr. Draghi took the central bank’s reins in Frankfurt last fall, investors have been calling his bluff in this regard. They have been betting that he could not persuade the euro zone’s biggest financier, the German central bank, to support any form of sustained bond buying because it would be seen as bailing out spendthrift governments.
But a view is now growing that Mr. Draghi may be on the way to persuading Germany that some form of central bank intervention — by committing to buy Spanish or Italian bonds when they rise above a certain interest rate, for example — can be justified. The challenge is to present it as simply one more step toward fiscal union as troubled euro zone members cede more control over their budgets to Brussels.
That is how Axel Merk sees it. Mr. Merk is president and chief investment officer of a mutual fund in Palo Alto, Calif., who manages about $600 million in currency-related investments. Long a euro bear, he began to buy the currency aggressively immediately after Mr. Draghi’s news conference, convinced that a policy Rubicon had been crossed.
“By imposing a vision, backed by rules and conditions, Draghi is achieving what politicians are not achieving,” Mr. Merk said. “He is basically saying to these countries that ‘if you give up control of your budgets, I will buy your bonds.’ He is laying out what he will do and holding people accountable. Some might call it genius, but it is really common sense.”
That said, many investors have not altered their core outlook that the currency must weaken over the longer term as economic conditions in the troubled countries deteriorate and richer countries like Germany resist putting up more bailout cash. Some even are pointing to Italy as more of a concern than Spain. Buying bonds may help in the short term, but it does little to address Italy’s inability to grow fast enough to pay down its debt, now more than 120 percent of its overall economy.
“The real problem is Italy,” said Gennaro Pucci, the chief investment officer at PVE Capital, a hedge fund in London with a focus on European bonds. “The banks are not lending and the debt-to-GDP is going up. The sooner the country asks for help from the IMF the better.”
Over the longer term, such a view may very well be valid. But when it comes to putting money to work in the euro zone, investment perspectives hew very much to the short term. And that, for Mr. Draghi, is the core problem, as frenetic buying and selling by foreign investors sustains a broad climate of fear and uncertainty in the market.
For example, from January through March of this year, investors were net sellers of close to 80 billion euros, ($100.6 billion at the current exchange rate), in euro zone stocks and bonds because of fear that Greece would leave the euro. In May and June, they bought 86 billion euros of euro zone securities as it became clear that a worst case would not materialize. Market mood swings of that sort are not conducive to the sort of long-term capital investment that can sustain economic growth.
For Mr. Draghi, then, the challenge is to persuade the newly optimistic euro zone traders to keep their positions and to persuade others that the waters are again safe for swimming. And to do that, he must persuade them that unlike his predecessor, Jean-Claude Trichet, he is not hostage to the doctrines that limit the bank’s powers of intervention.
“Draghi has put bond buying back on the table, even though there is no solution to the crisis — and that takes a lot of risk out of the equation,” said Jens Nordvig, a bond and currency strategist in New York for Nomura. Mr. Nordvig is advising clients to close out bearish euro trades before Mr. Draghi’s news conference next week.
“Draghi is perceived to be very pragmatic, and that is what the market respects,” Mr. Nordvig said. “The market does not respect dogma. If you are dogmatic in the markets, you will die.”