Opinion

Hugo Dixon

Athens can capitalise on market interest

Hugo Dixon
Nov 18, 2013 09:45 UTC

Greece has been the markets’ whipping boy for most of the past four years. But in the last few months, sentiment has changed and international investors are bottom-fishing – in particular for banking assets.

This gives the country a double opportunity: lenders can use it to clean up their balance sheets by selling non-performing loans; and the state can privatise its stakes in the banks. Both should grab the chance while it lasts.

Greece’s banks have been in a terrible mess as a result of the crisis. Not only were they loaded up with government bonds, which got haircut; even the big four that survived are weighed down by about 65 billion euros of non-performing loans, equivalent to around a third of GDP.

But a 40 billion-euro recapitalisation and restructuring of the sector, financed mainly by bailout money, has helped change investor perceptions. Several hedge funds – including Paulson & Co – have invested in the banks.

Last month Piraeus Bank placed 494 million euros of its shares and warrants with investors after BCP, the Portuguese lender, decided to sell out. Meanwhile, investors are heading to Athens looking to buy packages of non-performing loans on the cheap.

Greece’s reform job isn’t even half done

Hugo Dixon
Nov 11, 2013 09:51 UTC

Greece’s reform job is not even half finished. The government hasn’t done enough to root out the vested interests that strangle the economy. Nor has it cracked down fully on tax evasion or pushed hard enough to privatise state-owned properties.

On the other hand, Antonis Samaras’ coalition is so fragile that it could collapse if the troika – the European Commission, the European Central Bank and the International Monetary Fund – forces it to impose more austerity. That could lead to a new phase in the Greek crisis. The government’s best bet is to make a sharp distinction between structural reform and austerity – and persuade its lenders that it’s so serious about the former that more cuts and taxes aren’t required.

The atmosphere in Athens, which I visited last week, is tense. One reason is that two members of the ultra-right wing Golden Dawn party had just been murdered in a professional hit job. That followed the killing of a left-wing rapper by a member of Golden Dawn which, in turn, had triggered the arrest of the party’s leader. No one is quite sure whether this is the start of a cycle of violence which could destabilise the government, drive away tourists (the country’s main source of export revenues) and undermine business confidence.

ECB really must act on deflation

Hugo Dixon
Nov 4, 2013 15:00 UTC

The case for looser monetary policy should be clear when the European Central Bank governing council convenes in Frankfurt on Thursday. The question is what tools to use: lower interest rates, spraying the banks with more cheap long-term money or the ECB’s first dose of “quantitative easing”. The answer should be a mixture of all three.

Mind you, there are enough inflation hawks inside the governing council that it’s not certain it will even agree that more needs to be done. Some central bankers may argue monetary policy is already loose enough. After all, the ECB’s main interest rate is 0.5 percent and back in July the central bank said, in its first experiment with “forward guidance”, that it expected interest rates to “remain at present or lower levels for an extended period of time”.

What’s more, the euro zone is gradually recovering. In the second quarter, GDP rose 0.3 percent compared to the previous three months. As if this were not enough, Germany’s Bundesbank has started warning that property prices are getting overvalued in some German cities. Why stoke an emerging bubble with still cheaper money?

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?

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.

Euro zone needs anti-boom activism

Hugo Dixon
Sep 23, 2013 09:11 UTC

A big problem with the euro zone’s one-size-fits-all monetary policy is that it risks fitting nobody. That, indeed, was a key cause of the crisis. Early in the century, countries such as Spain and Ireland were booming, while Germany was in the doldrums. Setting interest rates at a level that worked well for the euro zone on average had the effect of inflating the Spanish and Irish property bubbles while pushing up wages so their economies became uncompetitive. When the bubbles burst, the damage was devastating.

It would be hard to argue that any part of the euro zone is currently booming. Even Germany will eke out GDP growth of only 0.3 percent this year, according to the International Monetary Fund. But it may not be long before the problems of a one-size-fits-all monetary policy are back to haunt the zone. Even though the German economy isn’t growing strongly, it is still outperforming the average. What’s more, labour is in short supply in Germany and house prices are rising at a moderate clip – a big contrast to the average, let alone recession-inflicted countries such as Italy.

The European Central Bank’s policy of keeping interest rates at the current 0.5 percent level or lower for an “extended period” is right for the euro zone on average. The weaker countries would benefit from even looser monetary policy. Germany, though, may already need something tighter. If the “extended period” of low interest rates goes on for years, it could experience a boom.

Still too big to fail

Hugo Dixon
Sep 16, 2013 09:29 UTC

Lehman Brothers’ bankruptcy five years ago crushed the global economy, turfed millions of people out of their jobs and left governments groaning under hefty debt burdens. Since then, policymakers have been beavering away to make sure that a similar calamity never happens again. Measures to address many of the key problems have been taken or are in the works. But if a Lehman went bust today, there would still be havoc.

The main success has been in building up the capital cushions banks have to withstand shocks. Since the end of 2009, the big global banks have increased their shareholder capital by $500 billion – the equivalent of 3 percent of their so-called risk-weighted assets, according to the Financial Stability Board (FSB), the organisation tasked by the G20 countries to fix the financial system. They are also on track to meet tighter global standards nearly five years ahead of the deadline.

But even this success has to be qualified. The amount of capital banks are supposed to hold depends on the riskiness of their loans. But lenders have too much freedom to decide for themselves how risky a loan is, giving them the opportunity to engage in monkey business. Meanwhile, inside the euro zone, the job of building capital buffers has not been properly done because of a tendency to sweep problems under the carpet. Thankfully, regulators are onto both these issues so there’s a reasonable chance they’ll be solved.

EU should refine its welfare policy

Hugo Dixon
Sep 9, 2013 09:16 UTC

The European Union is underpinned by the so-called “four freedoms”: the free movement of goods, services, capital and people. There’s little controversy over the first three. But the free movement of people has become a hot political issue in many countries, often whipped up by nationalist parties. Some people who want to keep immigrants out are racists. There are also two supposed arguments for keeping foreigners out: that they take both “our jobs” and “our benefits”.

Immigration is a particularly live issue in the UK. In the European Commission’s latest Eurobarometer survey, 32 percent of the British people questioned thought it was one of the two most important issues facing the country. The average for the EU as a whole was 10 percent.

In a poll for The Independent last month, two-thirds of those questioned thought British firms should give UK citizens priority over other candidates from elsewhere in Europe when hiring new workers – even if this meant Britain had to leave the EU. Just 16 percent disagreed. The UK Independence Party, which wants Britain to quit the EU, has heightened anxiety by arguing that there will be a wave of immigrants from Romania and Bulgaria after the last restrictions on their citizens’ movements are lifted at the end of this year.

Vodafone deal days back with a twist

Hugo Dixon
Sep 2, 2013 09:17 UTC

Vodafone’s deal-making days are back – with a twist. The UK mobile giant still holds the record for the world’s biggest deal – its $203 billion hostile acquisition of Germany’s Mannesmann in 2000. It is now on the verge of taking the number three slot as well, by selling its minority stake in Verizon Wireless, America’s largest mobile phone company, for $130 billion to Verizon Communications, which owns the rest.

Over its 31-year life, Vodafone has completed an astonishing series of deals. As so often with mergers and acquisitions, it has been a better seller than buyer. The same is likely to be the case with the Verizon deal.

Vodafone began its life when Racal Electronics, a UK defence firm, won a licence to provide cellular communications in Britain in 1982. As mobile communications started to boom, it soon became the jewel in Racal’s crown – so much so that Cable & Wireless, another UK telecoms group, tried to buy Racal in 1988.