Opinion

Hugo Dixon

Italy could reignite euro crisis

Hugo Dixon
Feb 26, 2013 10:15 UTC

Can the Italians be serious? That is likely to be the reaction of financial markets and the country’s euro zone partners as they ponder a disastrous election result, which could reignite the euro crisis. More than half of those who voted chose one of two comedians: Beppe Grillo, who really is a stand-up comic; and Silvio Berlusconi, who drove Italy to the edge of the abyss when he was last prime minister in 2011. Both are anti-euro populists.

This comedy could easily end in tragedy. The inconclusive result has echoes of last year’s first Greek election – except that Italy is bigger and more strategic. The country faces political paralysis, while its economy is shrinking and its debt is rising. The European Commission forecast last week that GDP would fall a further 1 percent this year after last’s year 2.2 percent drop. Debt, meanwhile, would reach 128 percent of GDP by the end of this year.

The euro crisis went into remission after the European Central Bank’s president Mario Draghi promised last summer to do “whatever it takes” to preserve the single currency. But, if Italy proves ungovernable during this critical time, even the ECB’s safety net may not work.

Investors are already getting nervous. Italian 10-year bond yields jumped 0.4 percentage points to 4.7 percent on Tuesday morning. Spanish yields also rose 0.2 percentage points to 5.3 percent, in the first sign of contagion. These are, though, admittedly still a far cry from the 7 percent-plus yields when the crisis was raging last July.

The risk is not that Berlusconi or Grillo will be prime minister. It is rather than nobody will be able to form a stable government. The electorate split into three roughly equal groups: Berlusconi’s centre-right group, Grillo’s uncategorisable 5-Star Movement and the centre-left coalition led by Pier Luigi Bersani. The centrist coalition led by Mario Monti, the technocratic who saved Italy from Berlusconi’s antics but whose austerity policies were deeply unpopular, came a poor fourth.

The Bundesbank isn’t mad

Hugo Dixon
Feb 18, 2013 09:33 UTC

The Bundesbank isn’t mad. In a world where it is increasingly fashionable to call for central banks to print money, the German central bank is one of the last bastions of orthodoxy. Although its stance is extreme, it is a useful antidote to the theory that easy money is a cost-free cure to economic ills.

The Bundesbank is hostile to anything that smacks of monetary financing – printing money to finance governments’ deficits. It is worried that central bank independence is getting chipped away as recession drags on in much of the developed world; it thinks that the European Central Bank shouldn’t respond to the recent rise in the euro by loosening monetary policy further; it is always concerned about the potential for inflation; and it thinks that spraying cheap money around can allow governments to shirk their responsibilities.

To many people, these attitudes seem old-fashioned. Surely central banks should bend the rules to get the world economy out of its current rut? A few go even further and advocate “overt monetary financing”, as Adair Turner, chairman of the UK’s Financial Services Authority, did in a seminal speech earlier this month. Overt monetary financing involves governments deliberately running fiscal deficits and openly funding them by borrowing from central banks.

Banks must probe clients’ motives

Hugo Dixon
Feb 11, 2013 10:17 UTC

Should an investment bank worry about a client’s motive when it engages in a complex and potentially suspicious transaction?

Monte dei Paschi di Siena (MPS) has been just such a client. The Italian bank, which has just been rescued by the state, engaged in a series of fiendishly complex deals with Deutsche Bank, JPMorgan and Nomura which had the effect of giving a misleading picture of its finances.

One controversy relates to how MPS paid for its acquisition of Antonveneta, another Italian bank, in 2008. JPMorgan helped finance part of the deal by selling 1 billion euros in so-called FRESH notes, a type of bond convertible into MPS equity. But the Bank of Italy objected that they were not sufficiently loss-absorbing and insisted that MPS only pay money to JPMorgan to forward onto the investors if it made a profit.

Mario Draghi’s poisoned banking chalice

Hugo Dixon
Feb 4, 2013 10:01 UTC

When euro zone governments agreed last year to give the European Central Bank the power to supervise its banks, that looked like another victory for its president Mario Draghi. It is more like a poisoned chalice.

The ECB will certainly get a chunk of extra power. But it will also be blamed when banks run into trouble, as they inevitably will. Draghi himself is experiencing this first hand following the scandal at Monte dei Paschi di Siena (MPS), which has had to be rescued by the Italian state. He has been lambasted for failing to supervise the country’s third largest bank properly when he ran the Bank of Italy – although the criticism seems overdone and has often been fuelled by his political opponents back in Rome.

The potential reputational risks for the ECB from banking snarl-ups on its watch are probably even bigger than they are for national central banks. This is because it doesn’t yet have the full set of tools to do the job properly. Moreover, a huge amount is at stake since the ECB is the euro zone’s most credible institution. If its reputation gets tarnished because of perceived supervisory failures, that could rub off on its ability to conduct monetary policy or manage crises effectively.