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.

MPS saga not just a local affair

Hugo Dixon
Jan 28, 2013 10:14 UTC

The Monte dei Paschi di Siena saga is not just an Italian affair. Revelations that complex financial transactions used by the country’s third largest bank had the effect of hiding losses are causing a political storm in Italy.

With a general election only weeks away, Silvio Berlusconi looks like being the main winner from the political spat. The former prime minister’s camp has attacked Pierluigi Bersani’s Democratic Party, which is leading in the opinion polls, for being close to Monte dei Paschi (MPS). It has also criticised Mario Monti, the current prime minister, who agreed to increase MPS’s bailout to 3.9 billion euros.

The scandal won’t be enough to get Berlusconi back as prime minister. But it could prevent a Bersani-Monti coalition from running the country with a solid majority in both houses of parliament. If so, fears about Italian political risk could return to haunt the markets.

UK faces five years of limbo-land

Hugo Dixon
Jan 23, 2013 11:33 UTC

The UK faces half a decade of limbo-land. David Cameron’s promise of an in/out referendum on Britain’s membership of the European Union by the end-2017— provided he wins the next election – means an extremely long period of uncertainty for business. That will be bad for investment. It also heightens the risk of an eventual “Brexit” – a British exit from Europe – which would be even worse for the economy.

An in/out referendum is neither desirable nor necessary. Of course, if the UK was planning to hand further powers to Brussels, it would be a good idea to get the people’s consent. But no leading British politician of either left or right is contemplating such a transfer of sovereignty. Cameron has been driven to promise such a referendum because of the pressure from eurosceptics within his Conservative party as well as fears that UKIP, a fringe political entity which wants Britain to leave the EU, could take votes away from the Tories in the 2015 election.

If Cameron had been promising a quick referendum, the uncertainty for business would be manageable. But he has decided that he first wants to see if he can negotiate a “new settlement” based on a competitive, flexible and fair single market. That’s why the referendum could be nearly five years away.

Hugo Dixon: When is it OK to avoid tax?

Hugo Dixon
Jan 21, 2013 10:23 UTC

When is it OK to avoid tax? And when should taxpayers refrain from actions that will cut their bills, even if their actions are perfectly legal? 

As the European economy remains sluggish, the public mood has turned against those who seem to be paying less than their fair share of tax. Last week, for example, saw Goldman Sachs abandon an idea to switch UK bonus dates to cut its employees’ tax bills and an escalation in the row about Greek tax cheating. 

The cases are, of course, very different. In Greece, tax evasion – which is against the law – is rife. The International Monetary Fund’s latest review on the country, published on Friday, says that the “losses to the state from tax evasion are enormous”. It estimates the black economy is 25 percent of GDP.

EU positive contagion hinges on growth

Hugo Dixon
Jan 14, 2013 09:50 UTC

Mario Draghi didn’t quite coin a new phrase last week. But the European Central Bank president certainly popularised the expression “positive contagion”. After years in which the euro zone has been suffering from plain old contagion – which doesn’t even need the qualifier “negative” – Draghi now thinks a positive dynamic is in play. 

The term “contagion” has tended to be used in financial markets to refer to the way that problems in one country (such as Greece) can so unnerve investors that they cause difficulties in other countries (for example, Portugal, Spain and Italy). Draghi, though, seems to be using the word more broadly to cover the whole panoply of vicious cycles that had been sucking the euro zone into a whirlpool. 

The ECB president is right that the vicious cycle in financial markets has given way to a virtuous one. The best measure of this is how peripheral bond yields have dropped since he said last July that the ECB would do whatever it took to preserve the euro – “and believe me, it will be enough”. Spanish 10-year yields have fallen from 7.4 percent to 4.9 percent, while Italian ones are down from 6.4 percent to 4.1 percent. The Stoxx 50 equity index, meanwhile, is up 12 percent. 

The EU speech Cameron should make

Hugo Dixon
Jan 7, 2013 10:05 UTC

David Cameron is planning a keynote speech on Britain’s relationship with the EU later this month. Here is what the UK prime minister should say.
 
 The euro crisis is forcing euro zone nations to rethink how they wish to run their currency union. It is also forcing European Union countries that don’t use the single currency, such as Britain, to rethink their relationship with Europe.

We have three main options: quit the EU; move to the edge as the euro zone pushes towards closer union; and seek to stay at the heart of Europe and influence its development in a way that promotes our interests.

There are members of my own Conservative party who would like Britain to quit. There are others who would like us to move to the periphery. But I am determined to make sure that we stay at the centre.

It’s 20.12.2012; and it’s the end of a magical era

Hugo Dixon
Dec 20, 2012 01:48 UTC

One doesn’t have to be a Mayan to believe that tomorrow represents a numerological end of an era. Apocalyptic visions stem from reading the Mesoamerican Long Count Calendar. But even using the widely used Gregorian Calendar, there’s something special about today: 20.12.2012.

It’s one of those dates where digits create interesting patterns. It also comes at the end of 13 years which have been astonishingly fertile for such numerologically “magic” dates. The rest of the century is going to be a desert by comparison.

Dates can be aesthetically attractive because they repeat a number several times (eg last week’s 12.12.12) or contain a string of successive numbers (eg last month’s 10.11.12) or because they are palindromes (eg 01.1.10), where you get the same date if you run the numbers backwards.