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From Draghi’s "Whatever It Takes" to Managing Fragmentation Risk
Warnock, Frank Case GEM-0212 / Published March 5, 2024 / 28 pages. Collection: Darden School of Business
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Written in February 2023, this case examines the eurozone from the perspective of core and periphery long-term rates. By 2010, the "Great Convergence" in eurozone long-term rates during the late 1990s had given way to the "Great Divergence," in which German long-term yields fell to record lows while Greek yields bounced between 20% and 40%. Periphery bond markets improved sharply in late summer 2012 after European Central Bank (ECB) President Mario Draghi committed to doing "whatever it takes" to preserve the euro, leading to another convergence in yields. Since the COVID-19 pandemic, the ECB has implemented a hitherto unthinkable differential bond-buying program to reduce "fragmentation" in member countries' bond markets. Both 2020 and 2021 were difficult for euro area countries, and the case ends with yet another shock: the Russian invasion of Ukraine, which made the vulnerability of Europe's energy supply abundantly clear and prompted inflation to reach a 40-year high. The protagonist had two decisions to make. First, what was the path of core (i.e., German) eurozone long-term interest rates likely to be over the next year? Was the dramatic decline in German long rates over the past few years an aberration that would soon be reversed, or was it part of the "new normal" that would persist for some time? Second, how would periphery long rates evolve relative to core rates? That is—the spread between long rates in the likes of Greece, Ireland, Italy, Portugal, and Spain (GIIPS), and those in Germany—how would they evolve over the next year? This case is used in Darden’s first- and second-year "Global Financial Markets" elective. It is appropriate for economics courses covering international and macro topics and for courses in international finance.




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  • Overview

    Written in February 2023, this case examines the eurozone from the perspective of core and periphery long-term rates. By 2010, the "Great Convergence" in eurozone long-term rates during the late 1990s had given way to the "Great Divergence," in which German long-term yields fell to record lows while Greek yields bounced between 20% and 40%. Periphery bond markets improved sharply in late summer 2012 after European Central Bank (ECB) President Mario Draghi committed to doing "whatever it takes" to preserve the euro, leading to another convergence in yields. Since the COVID-19 pandemic, the ECB has implemented a hitherto unthinkable differential bond-buying program to reduce "fragmentation" in member countries' bond markets. Both 2020 and 2021 were difficult for euro area countries, and the case ends with yet another shock: the Russian invasion of Ukraine, which made the vulnerability of Europe's energy supply abundantly clear and prompted inflation to reach a 40-year high. The protagonist had two decisions to make. First, what was the path of core (i.e., German) eurozone long-term interest rates likely to be over the next year? Was the dramatic decline in German long rates over the past few years an aberration that would soon be reversed, or was it part of the "new normal" that would persist for some time? Second, how would periphery long rates evolve relative to core rates? That is—the spread between long rates in the likes of Greece, Ireland, Italy, Portugal, and Spain (GIIPS), and those in Germany—how would they evolve over the next year? This case is used in Darden’s first- and second-year "Global Financial Markets" elective. It is appropriate for economics courses covering international and macro topics and for courses in international finance.

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