Opinion

Hugo Dixon

The euro zone’s self-fulfilling spiral

Hugo Dixon
Nov 20, 2011 20:41 UTC

When confidence in a regime’s permanence is shaken, it can collapse rapidly. The fear or hope of change alters people’s behavior in ways which make that change more likely. This applies to both political regimes such as Hosni Mubarak’s Egypt and economic regimes such as the euro.

Fear that the single currency may break up now risks becoming a self-fulfilling prophecy. Banks and investors are beginning to act as if the single currency might fall apart. Politicians and the European Central Bank need to restore belief that the single currency is here to stay. Otherwise, it could unravel pretty fast.

Until a few weeks ago, the idea that the euro wouldn’t survive the current debt crisis was a fringe view. Since the euro summit on Oct. 26-27, it has become a mainstream scenario. So much so that last week risk premiums on the bonds of even triple-A rated countries such as France and Austria rose to record levels, while Spain became the latest country to be sucked into the danger zone.

The summit itself made two technical decisions which have had damaging, unintended consequences. First, banks underwent a stress test that marked their sovereign bond exposures to market whereas previously regulators maintained the fiction that these positions were risk-free. This meant that lenders suddenly had to start holding capital to back their sovereign debt investments. Not surprisingly, they have become more reluctant to buy bonds. This, in turn, has made it harder for governments to fund themselves.

Second, the summit decided to strong-arm the banks into agreeing to a “voluntary” debt restructuring for Greece. Because the deal is supposedly voluntary, credit default swaps (CDS) – a type of insurance policy that pays out if an entity goes bust – won’t be triggered. This arm-twisting has convinced lenders that CDSs are a useless way of hedging the risk of investing in euro zone government bonds. Without a hedge, many prefer not to hold the bonds at all – again making it harder for states to fund themselves.

Italy’s super Mario brothers

Hugo Dixon
Nov 14, 2011 00:50 UTC


The Super Mario Brothers need to work together to save Italy and the euro.

Even if Mario Monti can form a strong government in Italy, the euro zone is vulnerable to bank runs and a deflationary spiral. Stopping that is the role of Mario Draghi, the European Central Bank’s boss. The zone needs vigorous supply-side reform but looser monetary policy. With Silvo Berlusconi gone, the duo and Germany’s Angela Merkel should try to forge a new grand bargain based on this.

Last week witnessed both the Italians and the Greeks dragged to the brink, look into the abyss and dislike what they saw. The two countries have or are in the process of forming national unity governments led by technocrats. This is a step in the right direction. But dangers abound.

The biggest risk is of a visible bank run. There has already been massive deposit flight in Greece as savers fear that the country could get kicked out of the euro – a scenario which is still real despite Lucas Papademos’ appointment as prime minister. But so far there have been no queues outside branches as there were with the UK’s Northern Rock in 2007. If that were to happen, television pictures would be relayed across Europe in seconds potentially provoking copycat runs.

Chaotic catharsis

Hugo Dixon
Nov 7, 2011 02:31 UTC

Chaos, drama and crisis are all Greek words. So is catharsis. Europe is perched between chaos and catharsis, as the political dramas in Athens and Rome reach crisis point. One path leads to destruction; the other rebirth. Though there are signs of hope, a few more missteps will lead down into the chasm.

The dramas in the two cradles of European civilization are similar and, in bizarre ways, linked. Last week’s decision by George Papandreou to call a referendum on whether the Greeks were in favor of the country’s latest bailout program set off a chain reaction that is bringing down not only his government but probably that of Silvio Berlusconi too.

The mad referendum plan, which has now been rescinded, shocked Germany’s Angela Merkel and France’s Nicolas Sarkozy so much that they threatened to cut off funding to Greece unless it got its act together — a move that would drive it out of the euro. But this is probably an empty threat, at least in the short term, because of the way that Athens is roped to Rome. If Greece is pushed over the edge, Italy could be dragged over too and then the whole single currency would collapse. So, ironically, Athens is being saved from the immediate consequences of its delinquency by the fear of a much bigger disaster across the Ionian Sea.

All roads lead to Berlusconi’s Rome. For now.

Hugo Dixon
Oct 31, 2011 01:14 UTC

The euro zone’s future hangs on Italy – and Italy’s future hangs on its politics. The best way forward would be a grand coalition replacing Silvio Berlusconi’s discredited government. But after the prime minister’s Houdini act last week, that doesn’t seem likely and other scenarios aren’t as attractive.

Until recently, investors didn’t pay too much attention to the multi-dimensional chess game that is Italian politics. The state may have nearly 2 trillion euros of debt, equal to 120 percent of GDP,  but the country is rich: Net household wealth was 8.6 trillion euros in 2009, according to the Bank of Italy. The deal-making and back-stabbing in Rome – or for that matter, Berlusconi’s bunga-bunga sex parties – didn’t seem to matter. True, the country has virtually stopped growing in recent years. But there was even a view that Italy benefited from having politicians that were so concerned with their elaborate games that they couldn’t interfere with the business of business.

All that changed in early July. As the euro crisis gathered pace, scandals and wrangling in Rome unsettled markets. The 10-year bond yield, which had been a relatively comfortable 4.8 percent, shot up to 6 percent in two weeks. Berlusconi and Giulio Tremonti, his previously respected finance minister, fell out. The center-right government, which survives on a wafer-thin majority, was able to pass austerity measures to cut the deficit. But the actions were seen as too little, too late. Investors became hyper-sensitive to Italian politics and were no longer willing to take things on trust.

The euro and the Hotel California

Hugo Dixon
Oct 26, 2011 15:26 UTC

The euro zone is like Hotel California, UBS wrote in a report published in September. “You can check out any time you like but you can never leave,” it said, quoting the Eagles song. A British businessman, Simon Wolfson, has now offered a 250,000 pound prize to the person who can come up with the most convincing explanation of how an orderly exit from the single currency is possible.

The problem is the word “orderly.” There are lots of scenarios where a country such as Greece could quit the euro in a disorderly fashion, destroying its own economy and that of its neighbous as well as possibly plunging the world into a recession. But how is it possible to do this without triggering financial Armageddon?

The first difficulty stems from the fact that an exit couldn’t happen overnight. There is no legal procedure for a country to quit. Joining was supposed to be an irrevocable commitment.

Bankers issue nostra culpa for economic crisis

Hugo Dixon
Oct 24, 2011 11:17 UTC

To: Barack Obama
From: Humboldt Pye, Chairman of First Reform Bank

Dear Mr. President:

I’m writing an open letter to you and other G20 leaders on behalf of the chairmen of the world’s leading banks to say sorry.

We do not think banks are to blame for every ill the world currently faces, as the Occupy Wall Street protests and their kin in other countries suggest. A balanced audit would attribute responsibility to policymakers too: you and your predecessors set the rules of the game that we so craftily exploited. Even the public had a hand in the current mess: excess spending in some countries and inadequate taxpaying in others allowed people to consume too much.

But we are not in a position to lecture the rest of society. During the bubble years, we focused first on our own pay packages and then on profits for our shareholders. Insofar as we thought about the wider interest, we comforted ourselves with the belief that financial markets were efficient and free markets were the best way of generating wealth. So, as we pursued our self-interest, the world must by definition get better.

Guantanamo’s detox man

Hugo Dixon
Oct 4, 2011 17:28 UTC

By Hugo Dixon

If anybody can provide a measure of legitimacy to the trials of detainees in Guantanamo Bay, Brigadier General Mark Martins may be that person. Barack Obama will certainly be hoping so. Martins, who was on the Harvard Law Review with the president when they were students, has this week taken over as chief prosecutor for military commissions at a time when the highest-profile Guantanamo detainees are coming to trial. The first death penalty moved a step closer last week when a trial was ordered for Abd al-Rahim al Nashiri, who allegedly planned the bombing of USS Cole in 2000. The case of Khalid Sheikh Mohammed (KSM), the alleged mastermind of the 9/11 attacks, is likely to follow shortly afterwards, in what some people are dubbing America’s Nuremberg trial.

The new chief prosecutor is a mixture of brain and brawn. A Rhodes scholar at Oxford, Martins is also a six-foot three-inch fitness freak. David Petraeus, the U.S. commander of the surges in both Iraq and Afghanistan and now director of the Central Intelligence Agency, describes him as a “once in a generation officer.” Martins also has a track record of tackling difficult assignments.

Guantanamo has been plagued by controversy ever since it was used as a detention camp for alleged al Qaeda and Taliban prisoners in early 2002. Military commissions were established at about the same time to try some of the detainees. The Guantanamo-cum-military commissions process has, to many critics, seemed toxic not least because some detainees were subjected to waterboarding and other coercive techniques before they arrived there; many have been detained for long periods without trial; and the few who have been tried (so far it is only six) were put through a judicial system that didn’t offer the normal protections available in U.S. courts of law.

Italian mega-tax would be game-changer

Hugo Dixon
Sep 13, 2011 21:08 UTC

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

An Italian mega-tax would be a game-changer. A one-off wealth tax of 400 billion euros, as proposed by the former UniCredit boss, Alessandro Profumo, would solve Italy’s debt problem, thus helping reverse the euro crisis in general. Italians are so wealthy, they could afford it. They certainly have no business asking for help from the Germans, who are actually poorer. But before such an idea has a hope of being implemented, Silvio Berlusconi would first need to be turfed out.

Italian entrepreneurs, including the head of Confindustria, the business lobby, have reacted surprisingly well to Profumo’s idea. Part of the reason is that every week Italians are effectively suffering a wealth tax as a result of plunging domestic stock and bond markets. The latest austerity programme, which would balance budgets in 2013, hasn’t stopped the rot. Even media reports that Italy was cosying up to China in the hope of getting it to buy bonds hasn’t helped. Yields rose again on Sept. 13 after a poor bond auction.

Can non-violent struggle bring down Syria’s Assad?

Hugo Dixon
Aug 1, 2011 13:40 UTC

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It was 2006. A young Syrian called Ausama Monajed was on a train to London. One of his hobbies was reading e-books. On this trip, he picked Gene Sharp’s From Dictatorship to Democracy, which maps out strategies for using non-violent struggle to bring down repressive regimes.

Monajed, now one of the revolution’s leaders outside the country, became engrossed. “It was as if I was reading an exact description of Syria,” Monajed told Reuters Breakingviews. The next thing he noticed was a conductor tapping him on the shoulder. The train had arrived at its terminus in Euston Station. “He asked me if I wanted to return where I’d come from.”

Greek rescue: pig in a poke

Hugo Dixon
Jul 26, 2011 15:29 UTC

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A deal was better than a disaster. But last week’s planned rescue of Greece has the astonishing by-product of increasing its debts. It also lets private creditors off lightly while making taxpayers elsewhere in the euro zone pay through the nose. It doesn’t even mark the end of the crisis.

True, the sustainability of the Hellenic Republic’s debt has been improved. Its government will receive 109 billion euros of new 15-30 year loans from the euro zone at an interest rate of only 3.5 percent. Private-sector creditors will also swap or roll over 135 billion euros of existing bonds into new longer-term instruments.