Opinion

Hugo Dixon

MPS saga not just a local affair

Hugo Dixon
Jan 28, 2013 10:14 UTC

The Monte dei Paschi di Siena saga is not just an Italian affair. Revelations that complex financial transactions used by the country’s third largest bank had the effect of hiding losses are causing a political storm in Italy.

With a general election only weeks away, Silvio Berlusconi looks like being the main winner from the political spat. The former prime minister’s camp has attacked Pierluigi Bersani’s Democratic Party, which is leading in the opinion polls, for being close to Monte dei Paschi (MPS). It has also criticised Mario Monti, the current prime minister, who agreed to increase MPS’s bailout to 3.9 billion euros.

The scandal won’t be enough to get Berlusconi back as prime minister. But it could prevent a Bersani-Monti coalition from running the country with a solid majority in both houses of parliament. If so, fears about Italian political risk could return to haunt the markets.

The still-murky saga has also put Mario Draghi under the spotlight because the ECB president ran the Bank of Italy when MPS was getting into such a mess. Giulio Tremonti, who was finance minister in Berlusconi’s last government, tweeted that it was “stupefying” that Draghi had failed to discover or prevent the complex transactions.

The Italian central bank’s defence is that, while some of its supervisors knew about the transactions, it did not know that they were linked to other loss-making operations because key documents were hidden from it. What’s more, even though it was worried about MPS’s weak risk management, it didn’t have the power to fire bank directors, despite Draghi requesting the last Berlusconi government for such authority. Its moral suasion did, though, eventually help remove the old MPS management last year.

UK faces five years of limbo-land

Hugo Dixon
Jan 23, 2013 11:33 UTC

The UK faces half a decade of limbo-land. David Cameron’s promise of an in/out referendum on Britain’s membership of the European Union by the end-2017— provided he wins the next election – means an extremely long period of uncertainty for business. That will be bad for investment. It also heightens the risk of an eventual “Brexit” – a British exit from Europe – which would be even worse for the economy.

An in/out referendum is neither desirable nor necessary. Of course, if the UK was planning to hand further powers to Brussels, it would be a good idea to get the people’s consent. But no leading British politician of either left or right is contemplating such a transfer of sovereignty. Cameron has been driven to promise such a referendum because of the pressure from eurosceptics within his Conservative party as well as fears that UKIP, a fringe political entity which wants Britain to leave the EU, could take votes away from the Tories in the 2015 election.

If Cameron had been promising a quick referendum, the uncertainty for business would be manageable. But he has decided that he first wants to see if he can negotiate a “new settlement” based on a competitive, flexible and fair single market. That’s why the referendum could be nearly five years away.

Hugo Dixon: When is it OK to avoid tax?

Hugo Dixon
Jan 21, 2013 10:23 UTC

When is it OK to avoid tax? And when should taxpayers refrain from actions that will cut their bills, even if their actions are perfectly legal? 

As the European economy remains sluggish, the public mood has turned against those who seem to be paying less than their fair share of tax. Last week, for example, saw Goldman Sachs abandon an idea to switch UK bonus dates to cut its employees’ tax bills and an escalation in the row about Greek tax cheating. 

The cases are, of course, very different. In Greece, tax evasion – which is against the law – is rife. The International Monetary Fund’s latest review on the country, published on Friday, says that the “losses to the state from tax evasion are enormous”. It estimates the black economy is 25 percent of GDP.

EU positive contagion hinges on growth

Hugo Dixon
Jan 14, 2013 09:50 UTC

Mario Draghi didn’t quite coin a new phrase last week. But the European Central Bank president certainly popularised the expression “positive contagion”. After years in which the euro zone has been suffering from plain old contagion – which doesn’t even need the qualifier “negative” – Draghi now thinks a positive dynamic is in play. 

The term “contagion” has tended to be used in financial markets to refer to the way that problems in one country (such as Greece) can so unnerve investors that they cause difficulties in other countries (for example, Portugal, Spain and Italy). Draghi, though, seems to be using the word more broadly to cover the whole panoply of vicious cycles that had been sucking the euro zone into a whirlpool. 

The ECB president is right that the vicious cycle in financial markets has given way to a virtuous one. The best measure of this is how peripheral bond yields have dropped since he said last July that the ECB would do whatever it took to preserve the euro – “and believe me, it will be enough”. Spanish 10-year yields have fallen from 7.4 percent to 4.9 percent, while Italian ones are down from 6.4 percent to 4.1 percent. The Stoxx 50 equity index, meanwhile, is up 12 percent. 

The EU speech Cameron should make

Hugo Dixon
Jan 7, 2013 10:05 UTC

David Cameron is planning a keynote speech on Britain’s relationship with the EU later this month. Here is what the UK prime minister should say.
 
 The euro crisis is forcing euro zone nations to rethink how they wish to run their currency union. It is also forcing European Union countries that don’t use the single currency, such as Britain, to rethink their relationship with Europe.

We have three main options: quit the EU; move to the edge as the euro zone pushes towards closer union; and seek to stay at the heart of Europe and influence its development in a way that promotes our interests.

There are members of my own Conservative party who would like Britain to quit. There are others who would like us to move to the periphery. But I am determined to make sure that we stay at the centre.