Opinion

Hugo Dixon

The City has huge scope to expand

Hugo Dixon
Oct 28, 2013 10:14 UTC

Finance has rightly been in the sin bin for the last six years. And the cleanup job isn’t finished. But Mark Carney, the new Bank of England governor, is correct to stress how a large and expanding City of London is good for Britain, Europe and the world – provided it is properly organised.

Carney’s comments, in a speech last week, will seem heretical to many – maybe even to his predecessor, Mervyn King, who showed a barely disguised disdain for financiers. Would it really be healthy, for example, for the balance sheets of British banks to reach nine times GDP, double the current ratio – as Carney projected they could by 2050?

British public will have some big questions about the potential resurgence of finance. Will taxpayers be asked to swoop in again to bail out bust banks? If a rescue is needed, would the government have the wherewithal to support a gigantic sector? Is it wise for the UK to put so many of its eggs in the finance basket?

The answer to the first question is not yet a firm “no”. The job of making the financial system safe is still a work in progress. The priority is to ensure that any bank can fail without wreaking economic havoc. In theory, this can be done by “bailing in” shareholders and bondholders, rather than relying on taxpayers. But there must be enough capital to absorb all the losses and authorities across the world will have work together seamlessly.

Carney is alive to this issue, and in a position to do something about it. He’s not just governor of the Bank of England. He’s also chair of the Financial Stability Board, the body tasked by the G20 to fix the global financial system. But until more progress is made, the public cannot relax.

Brexit process would be messy

Hugo Dixon
Oct 21, 2013 08:58 UTC

Imagine the British people vote to quit the European Union in the referendum David Cameron has promised to hold by 2017. What happens next? What, if any, special relationship would the UK seek to retain with the EU? Would it be able to negotiate what it wanted? And how would the economic damage unleashed by years of uncertainty be kept to the minimum?

These questions aren’t just troubling British businesses, the vast majority of which want to stay in the EU so they can enjoy full access to its single market. They are also worrying some eurosceptics who are concerned that, even if it would be good for Britain to quit the EU, the process of getting from A to B could be messy.

Hence, the launch of a 100,000 euros prize by the Institute for Economic Affairs, a UK eurosceptic think-tank. It will announce later this month the shortlist for the best essay to answer the question of what measures are needed to ensure a free and prosperous economy after an “out” vote in a putative referendum.

Bundesbank right to focus on doom loop

Hugo Dixon
Oct 7, 2013 08:48 UTC

Germany’s Bundesbank is not afraid of playing the role of bad fairy. Last year it opposed the European Central Bank’s scheme for buying potentially unlimited quantities of sovereign bonds – a promise which ended the hot phase of the euro crisis. Last week, it criticised rules that encourage euro zone banks to load up on their own governments’ debts.

Jens Weidmann, the Bundesbank president, is right to put this topic on the agenda. After all, the exposure of banks to governments is one half of what has been dubbed the “sovereign-bank doom loop.” When governments such as Greece got into trouble, they dragged their banks down as well. (The other half of the doom loop involves troubled banks dragging down their governments.)

The problem is how to break this loop without triggering a new crisis in vulnerable countries such as Italy and Spain. After all, if their banks were suddenly told to cut their holdings of Italian and Spanish bonds, Rome and Madrid would be hard-pressed to fund themselves.