Opinion

Hugo Dixon

Global economy not as healthy as it looks

Hugo Dixon
Jan 25, 2011 20:48 UTC

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

The global economy is not as healthy as it looks. The International Monetary Fund now predicts 4.4 percent growth for 2011. But inflation has reared its ugly head across the globe, suggesting that many economies are growing faster than can be sustained without structural changes. Spurring on reform should be the main focus of the annual World Economic Forum shindig this week in Davos.

If one wants to look at the glass half full, there are things to feel positive about. The U.S. economy is growing smartly again — the IMF predicts 3 percent this year. China and India should each grow at around 9 percent this year. Even the euro zone may be pulling itself out of crisis.

But the glass is still very much half empty, too. America is only growing so rapidly because it has engaged in loose monetary and fiscal policies. The monetary splurge has resulted in hot money spilling out across the world — which, in turn, is driving asset and consumer price inflation and that is causing difficulties in emerging economies. The fiscal profligacy, meanwhile, will have to be reined in — or America will suffer its own sovereign debt crisis in a few years time. The same goes for Japan, which is living on borrowed time and borrowed money.

China and India, meanwhile, are trying to curb inflation. But each is moving gingerly. Beijing is unwilling to allow the yuan to appreciate significantly — something which would also help rebalance global trade flows. And India is maintaining negative real interest rates, despite nudging up policy rates by another 25 basis points this week.

India needs solution to $1.5 trillion puzzle

Hugo Dixon
Jan 24, 2011 09:45 UTC

– The authors are Reuters Breakingviews columnists. The opinions expressed are their own –

By John Foley and Hugo Dixon

HONG KONG/LONDON (Reuters Breakingviews) – India needs a solution to a $1.5 trillion-plus puzzle. That’s what it will need to invest in infrastructure over the next decade if it is to have any hope of achieving its aspiration of 10 percent GDP growth.

The government and banks, India’s traditional sources of infrastructure funding, won’t be able to carry that load on their own. Financial liberalisation, something the country has hitherto shied away from, could help fill the gap.

India can’t afford to be soft on corruption

Hugo Dixon
Jan 14, 2011 09:18 UTC

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

By Hugo Dixon

LONDON (Reuters Breakingviews) – India can’t afford to be soft on corruption. The government’s lacklustre response to a series of scandals isn’t just woeful; it is symptomatic of a general lack of reformist zeal which could drag down the country’s medium-term growth.

India’s big success in the past two decades has been to put behind it what used to be called the Hindu rate of growth, roughly 3.5 percent a year. The country achieved an average 9 percent growth in the four years running up to the financial crisis. That dipped to 6.7 percent and 7.4 percent in the last two financial years, but is now back to nearly 9 percent. At some time over the next few years, India’s growth could outpace even China’s, as the Middle Kingdom starts to slow.

India is behind curve on inflation

Hugo Dixon
Jan 10, 2011 09:58 UTC

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

By Hugo Dixon

LONDON (Reuters Breakingviews) – India is behind the curve on inflation. It’s not just that weekly food inflation has hit 18 percent; the current account deficit is also uncomfortably high.

The authorities need to get a grip, even if that means sacrificing 9 percent GDP growth in the coming year. Structural reforms, not loose policy, are the only sure way to sustain rapid growth.

Can you buck the markets?

Hugo Dixon
Dec 7, 2010 21:12 UTC

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

LONDON — Can you buck markets? Margaret Thatcher said you couldn’t; Angela Merkel, by contrast, believes in the “primacy of politics”. Who’s right depends on whether politicians have the will to change the unpleasant reality that markets can reflect. The euro crisis is testing this theory to destruction.

In one sense, Britain’s iron lady was right. Markets are messengers — sometimes of doom, at other times of glad tiding. Actions like restricting short-selling of financial stocks, Merkel’s bright idea in May, are pointless. They don’t change reality. Even intervention in the markets — such as the European Central Bank’s sovereign bond-buying programme, which restored calm late last week — only buys time.

It’s the funding, stupid

Hugo Dixon
Nov 29, 2010 16:51 UTC

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

LONDON — Running out of cash — rather than insolvency — is what causes financial crises such as the euro zone’s. Yet the lion’s share of the effort by policy makers around the globe has been to shore up solvency not funding. Unless that changes, the world will lurch from crisis to bailout and back again.

Ireland’s bank crisis is only the latest example of how seemingly solvent institutions can be brought to the brink because they can’t fund themselves. It was only four months ago that Allied Irish Banks (AIB) and Bank of Ireland were given a clean bill of health in the European Union’s official stress tests. One weakness of these tests was that they only stressed solvency not liquidity, although that may be remedied next year.

The world is wasting a good crisis

Hugo Dixon
Nov 22, 2010 18:14 UTC

Rahm Emanuel, President Barack Obama’s former chief of staff, popularized the motto that one shouldn’t waste a good crisis. But there is a severe risk that this is precisely what the world has been doing by being excessively soft in bailing out banks and countries since Lehman Brothers went bust in 2008.

Bailouts, such as that being negotiated for Ireland, may be needed to prevent a descent into chaos. But the conditions must be tough. Otherwise, the world won’t learn the lessons from the crisis and justice won’t be seen to be done.

Ireland’s original bank bailout in the wake of the Lehman bankruptcy is one of the most egregious cases of excessive softness. Dublin gave a blanket guarantee to its banks’ liabilities, including wholesale funding. A more targeted guarantee focusing on retail deposits would have been far better. Not only would the creditors have been punished; the state itself wouldn’t now need its own bailout.

UK bank pay collusion would be least bad solution

Hugo Dixon
Nov 15, 2010 21:59 UTC

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

LONDON — “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” Normally, Adam Smith’s dictum is a good guide to policy. But in the case of UK banks and their bonuses, it isn’t.

Clubbing together to keep bonuses down wouldn’t please competition purists. Depending on how such talks are orchestrated, it may even be illegal. One could imagine peculiarly tin-eared traders taking their employer to court for
unfairly conspiring to keep down their pay.

Letter from the Editor

Hugo Dixon
Oct 25, 2010 22:31 UTC

Reuters Breakingviews is more used to commenting on other organisations’ behaviour than to having its own actions put under the microscope. But in the last week, as a result of retroactive disclaimers we made to a series of articles in order to clarify potential conflicts of interest, we have rightly been under scrutiny.

We have now completed our inquiries and I wanted to explain to you what happened and how we plan to act in future.
Reuters’ Handbook of Journalism forbids journalists from dealing in “securities about which they have written recently or about which they intend to write in the near future”. It also requires them to notify their manager before writing about a company in which they have a financial interest. The purpose of these rules is to avoid actual or apparent conflicts of interest.

Late last month, a journalist told one of our editors that he had acquired BP shares near their trough following the Gulf of Mexico blow-out. The columnist had written about BP around the time he bought the shares. After further inquiries, it emerged that he had traded in six other stocks (of which four involved taking up his rights in rights issues) within one month either side of writing about them. He also disclosed that he had written about another eight stocks in which he had a significant financial interest. In total, 15 stocks were affected and 39 stories were re-filed with disclaimers. Although we found no evidence that the columnist had abused his journalistic position for financial gain, we view this as a serious matter. The journalist resigned.

Asia should grab hot IPO money while it lasts

Hugo Dixon
Oct 12, 2010 21:25 UTC

Hot money is the bugbear of policy makers in many developing economies. Just ask Brazil or, indeed, Thailand, which has just imposed a 15 percent withholding tax on interest and capital gains earned by foreign investors on Thai bonds.

One worry is that booming currencies will become uncompetitive; another is that easy-come, easy-go money will make economies vulnerable to booms and busts.

But not all inflows are bad. Provided capital can be locked in at cheap rates and turned to productive use, it can even be good. One of the best ways of doing so is for companies to take advantage of the current IPO boom.