Hugo Dixon

Why do markets pay attention to rating agencies?

Hugo Dixon
Apr 28, 2010 23:21 UTC

Why do markets still pay attention to what rating agencies have to say? Following their appalling record predicting the subprime mortgage crisis, it is astonishing and sad that investors still seem to quake when Standard & Poor’s junks Greece and downgrades Spain.

An arriving Martian would find it hard to understand why anybody gives any credence at all to S&P and its rivals Moody’s or Fitch. It’s not just that they were pumping up the U.S. subprime market — for example giving a triple-A rating to Abacus, Goldman Sachs’ now-notorious synthetic collateralised debt obligation — after smart investors saw trouble in the market.

They were late in spotting the wave of corporate debt defaults, including Enron’s, in the early part of the century. And they have been dilatory in calling attention to the current euro zone sovereign debt crisis. Even after S&P’s downgrade of Spain, Moody’s and Fitch, the other big agency, are still rating the country’s debt at triple-A. Ratings agencies are consistently behind the curve.

So why do they still wield influence? There are at least two reasons. One is because they are embedded in the way markets operate. Some investors, for example, are only allowed to buy investment-grade securities. That means they have to sell securities when they are junked. Similarly, ratings are used in determining the riskiness of a bank’s balance sheet and how much capital it needs to set aside.

Ratings are also common in deciding how big a haircut is required when banks and investors pledge collateral. One saving grace in the euro zone crisis is that the European Central Bank has stopped saying that only the highest rated sovereign debt can be pledged as collateral. But ratings are still far too entrenched.

Fiat to spin off auto business: source

Hugo Dixon
Apr 20, 2010 16:01 UTC

LONDON/TURIN, Italy (Reuters) – Italian industrial group Fiat SpA <FIA.MI> will spin off its auto business under a new strategic plan, a source said on Tuesday, and shares surged almost 9 percent on the possibility of a demerger.

Analysts said a spin-off would give the Italian carmaker more flexibility to join the consolidation drive in a sector emerging from the worst downturn in decades.

FiatLuca Cordero di Montezemolo also said he would resign after six years as chairman of Europe’s fifth-biggest car maker. The announcement came a day ahead of Fiat’s strategy presentation, its first since teaming up with U.S. car maker Chrysler.

Goldman’s CDO investors: fools or victims?

Hugo Dixon
Apr 19, 2010 12:36 UTC

By Hugo Dixon and Richard Beales

Were the investors who lost $1 billion by buying a fearfully complex product sold by Goldman Sachs in the dying days of the credit boom fools or victims? That’s the key distinction on which the U.S. Securities and Exchange Commission’s fraud charges, which roiled the investment bank when they were unveiled on Friday, hinge.

Back in 2007, Goldman sold investors a $1 billion synthetic collateralised debt obligation (CDO). A CDO is a pool of securities, in this case 90 subprime residential mortgage backed securities. A synthetic CDO is based on a pool of derivatives that reference securities rather than the securities themselves.

The SEC’s key allegation is that Goldman marketed this synthetic CDO to investors without telling them that Paulson & Co, the hedge fund, had been involved in selecting the securities that were subject to the bet. What’s more, it didn’t tell investors — or ACA, an independent firm that officially selected the underlying securities — that Paulson was simultaneously placing bets with Goldman that these securities would fall in value.

Fears of UK hung parliament may be overstated

Hugo Dixon
Apr 19, 2010 07:58 UTC

– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –

Fears of a huhugodixon-150x150ng parliament following the UK’s general election may be overstated. With Nick Clegg, leader of the Liberal Democrats, Britain’s third largest party, performing well in the first prime ministerial debate, sterling has received a mild knock. Investors do not like the uncertainty that goes with a hung parliament. While many European countries are used to coalition government, the UK is traditionally a two-party system – with government swinging between Labour and the Conservatives.

Added to this uncertainty is the fact that none of the three parties has come up with a credible plan for cutting the government’s deficit, which stands at 12 percent of GDP. One fear is that valuable months could be lost in horse-trading over forming the next government. Another is that a minority government could embark on a populist, but expensive, programme to prepare the ground for a second election later this year.

Europeans won’t be amused by alleged Goldman scam

Hugo Dixon
Apr 16, 2010 18:02 UTC

Europeans won’t be amused by the alleged Goldman Sachs scam. ABN Amro, and therefore ultimately Royal Bank of Scotland, ended up losing $841 million in the allegedly fraudulent collateralised debt obligation investment concocted by the investment bank. Meanwhile, IKB, the bust German bank, lost nearly $150 million.

These European banks were some of the biggest financial mugs in the last years of the credit bubble. But the allegations levelled by the Securities and Exchange Commission don’t concern the folly of the buyers and insurers of subprime mortgage investments. Goldman is accused of misleading investors. The UK and German states, which bailed the banks out, will be livid if the case is proved. Goldman denies the charges.

The UK government could be the biggest loser if the allegations turn out to be true. After all, it had to rescue RBS only two months after the Scottish bank paid Goldman $841 million to unwind a guarantee it inherited when it acquired part of ABN Amro, the Dutch bank, according to the SEC. Of course, the hole at RBS was much bigger than that. Still, there must be a risk that the issue could become a political football given that the UK is in the midst of a tight election campaign in which banker-bashing is a popular activity among all the main parties.

Crisis, what crisis?

Hugo Dixon
Apr 16, 2010 10:35 UTC


– The author is a Reuters Breakingviews columnist. The opinions expressed are his own. –

 Crisis, what crisis? That could be motto for the election manifestos published by Britain’s main political parties this week. Neither Labour nor the Conservatives addressed the country’s fiscal crisis head-on.

Instead, they have sought to bribe the electorate with promises.

There are some good ideas in the manifestos. But there are too many promises to cut taxes and not to touch spending – as well as a general lack of urgency. Once one puts the pledges into categories of good, bad and ugly, there are too few in the former bucket.

Sovereign debt maths show risk of vicious circle

Hugo Dixon
Apr 9, 2010 15:07 UTC

How can a country support debt of over 100 percent of GDP for many years and then suddenly start spiralling towards insolvency? That question of sovereign debt maths is not merely academic. It is highly relevant to the likes of Greece and Italy.

The answer is that size of the sovereign debt burden is not everything when it comes to keeping up with interest payments. No matter how high the ratio of debt to GDP may be, it does not need to increase as long as the government has two factors going its way: the “primary” budget balance — the balance before interest payments — and the growth rate of nominal GDP.

To see how these play out, consider two countries. One has a moderate debt load, 50 percent of GDP, which carries a 4 percent average interest rate. If the budget is in primary balance, the government will still run a deficit of 2 percent of GDP, which is 4 percent (the interest rate) of 50 percent (the debt). As long as nominal GDP grows by 4 percent, the ratio of debt to GDP stays the same.

The UK should not waste its fiscal crisis

Hugo Dixon
Apr 7, 2010 09:54 UTC

hugodixon–  The author is a Reuters Breakingviews columnist. The opinions expressed are his own  –

 The UK should not waste its fiscal crisis. As Britain embarks on its election campaign, this is a perfect opportunity to engage in radical tax and spending reforms designed not just to restore the country’s fiscal balance but to boost its long-term productivity and competitiveness.

It is, of course, necessary to cut the deficit, which is currently running at an unsustainable 12 percent of GDP. It is also important that spending cuts rather than tax rises bear the brunt of the belt-tightening. Otherwise, the UK will find that companies and rich people are increasingly driven off-shore.