Monday 4 May 2015 10:45 pm

Super Mario Draghi: Age of unwinding? - CNBC Comment

THE PAST few years have seen central banks invested with almost super hero-like powers. Super Mario Draghi might not be one of the characters in Avengers: Age of Ultron, but his powers are almost as impressive as Iron Man’s. And has Iron Man ever pumped so much money into the Eurozone’s financial system that he kickstarted a moribund region? I bet he hasn’t – although he is a snappier dresser, much as we all love waiting to see what colour tie Draghi will be wearing at the European Central Bank’s monthly press conference. With the bond markets now firmly in comic-book territory, Poland last week became the first emerging market to sell its debt at a negative yield. I in no way wish to denigrate Poland, which has shown robust economic growth over the past few years, but it is still six investment notches (according to Standard & Poor’s) below neighbouring Germany. And for good reason. It is only in extraordinary times, with negative interest rates now widespread, that it would be selling debt at -0.2 per cent. So when and how can central banks get life back to normal? After all, Tony Stark has a lot of difficulty staying out of the Iron Man suit when asked to do so. As there is no precedent in economic history for negative nominal interest rates, it’s difficult to predict. The Bank for International Settlements, one of the few financial institutions to see the last crisis coming, has already warned of the potential for “significant and widespread losses on investors, with potentially serious consequences for financial and economic stability”, as the lines between risky and less risky assets become blurred. There are also concerns that mutually destructive currency wars may break out, if countries and currency zones are eventually all trying to depreciate at the same time. With quantitative easing, there has always been a danger that central banks are fixing yesterday’s problems. Using looser monetary policy to balance tighter fiscal policy might have helped to prevent the last crisis. The next one is unlikely to take exactly the same shape. The flood of money and asset-buying may allow governments to put off reforms, by giving politicians an excuse to procrastinate when economic crisis seems far away. When the exhilaration of flying in a fantastical suit wears off, investors could be coming back to earth with a bump. Catherine Boyle (@cboylecnbc) is a senior correspondent for CNBC, based in London.