Opinion

Hugo Dixon

Cyprus leaves banking union up in air

Hugo Dixon
Apr 1, 2013 21:08 UTC

The Cypriot catastrophe shows just how far away the euro zone is from creating its much-touted “banking union”. There was no euro zone supervision of Cyprus’ big banks, no transnational approach to put them into controlled bankruptcy, no common deposit insurance and no flow of bank rescue funds from abroad.

Instead, there was weak supervision by the Central Bank of Cyprus and a mad scramble to carve up the banks’ assets on national lines. Nicosia was left to shoulder the whole cost of protecting small depositors and the euro zone said that none of its bailout cash could be injected into the troubled banks.

Optimists hope the fiasco will provide the euro zone with the impetus to complete its banking union. But it is equally possible that core countries such as Germany, Finland and the Netherlands will become even more reluctant to absorb the liabilities of bust peripheral banks.

Indeed, Jeroen Dijsselbloem, the Dutch finance minister who runs the Eurogroup, suggested last week that the treatment meted out to Cyprus could be a model for other bailouts – though he later said his words had been taken out of context.

Last summer at the height of the panic over Spain’s banks, the euro zone embarked on the initial step towards banking union. The idea was to break the “doom loop” under which weak banks were dragging down weak governments and vice versa. Leaders agreed that the European Stability Mechanism (ESM), the zone’s bailout fund, could be used to recapitalise bust banks — but only once an effective supervisory mechanism was in place. The European Central Bank was chosen to be that supervisor.

Cyprus controls an “omnishambles”

Hugo Dixon
Mar 28, 2013 10:40 UTC

Cyprus’ capital controls are an “omnishambles”. If the Argentine-style “corralito” really can be lifted in seven days, the damage could be contained. But that doesn’t seem credible. Extended controls could spawn bribery, sap confidence, further crush the economy, spread contagion and ultimately lead to the country’s exit from the euro.

The lesson of capital controls elsewhere is that, once they are imposed, they are hard to remove. Iceland’s curbs are still in place five years after they started. In Argentina, they lasted a year.

There’s little reason to suppose it will be much different in Nicosia. After all, the restrictions – which limit both the amount of money people can take from their banks and the amount they can transfer abroad – have been imposed because the lenders do not have enough access to ready funds. If there’s not sufficient liquidity today, why should anybody believe there will be enough in a week, a month or even a year?

Cyprus deal best of a very bad job

Hugo Dixon
Mar 25, 2013 10:27 UTC

Cyprus’ economy is going to suffer terribly in the next few years. Some of that is inevitable given how bloated the banking system had become. But the disastrous handling of the crisis, especially in the past week, will make things much worse.

That said, the bailout deal that Cyprus reached with its euro zone partners in the early hours of Monday morning makes the best of an extremely bad job – both for the small Mediterranean island and its rescuers.

It establishes three important principles. First, there will be no losses for insured deposits. Last week’s aborted deal foolishly involved taxing them at 6.75 percent. Second, uninsured creditors rather than taxpayers will pay the entire cost of bailing out Cyprus’ two troubled banks – Cyprus Popular Bank (CPB) and Bank of Cyprus (BOC). Third, Cyprus’ oversized banking sector, which depended heavily on somewhat dubious Russian cash, will be slimmed down.

All Cyprus plan Bs look dreadful

Hugo Dixon
Mar 20, 2013 10:49 UTC

The Cypriots have an expression: eninboro allo. It means: I cannot take any more of it.

There was jubilation last night outside the small Mediterranean island’s parliament when every single MP either voted against a plan to tax depositors or abstained. The message was that people of Cyprus had had enough and weren’t going to let the big bullies, led by Germany, boss them around.

The plan to tax insured deposits was a dreadful mistake – I have described it as legalised bank robbery. But the deposit tax was part of an unpalatable but available 10 billion euro bailout, agreed with the euro zone. That plan A is now at risk. As Cypriots contemplate possible plan Bs, their jubilation may start to fade: all of them are also dreadful.

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.

Dos and Don’ts of EU banking union

Hugo Dixon
Dec 10, 2012 10:44 UTC

Conventional wisdom has it that the euro zone needs a banking union to solve its crisis. This is wrong. Not only are there alternatives to an integrated regulatory structure for the zone’s 6,000 banks; centralisation will undermine national sovereignty.

“Create a banking union” became a rallying cry earlier in the year when it looked like the euro was going to explode. Advocates of a single banking authority said it would break the “doom loop” which tied troubled banks to troubled governments. European Union governments will this week continue their attempt to agree on a single supervisor, the first stage of a banking union.

There are two parts to the doom loop: when banks go bust, their governments bail them out, adding to their own debts; and when governments become over-indebted, the nation’s banks are usually big lenders, so the banks get sucked into the sovereign debt vortex.

Euro zone doesn’t need Disziplin union

Hugo Dixon
Oct 22, 2012 08:59 UTC

European leaders nudged forward plans for a fiscal union with discipline as its leitmotif at last week’s summit. But such a “Disziplin union” is neither desirable nor necessary. It may not even be politically feasible.

The consensus among the euro zone political elite is that fiscal union is needed to complete the crisis-ridden monetary union. There are two rival views of what this should consist of: a panoply of rules to prevent and punish irresponsible behaviour; or financial payments to help weaker economies. The former view, espoused by Germany, is in the ascendant. It involves lots of sticks but not many carrots.

The summiteers’ main achievement was to give further impetus to the idea that the European Central Bank should act as the zone’s central banking supervisor from the start of next year after Berlin dropped its insistence that its own savings banks should be excluded from the regime. That was an important political concession. It’s also conceivable that the new supervisor will be better able to clean the cesspits in parts of the euro zone than the current often-conflicted national supervisors.

Banks should learn to say “Just Go”

Hugo Dixon
Sep 24, 2012 08:44 UTC

Shortly after last year’s bonus round I was having lunch with the boss of an investment firm. He told me how he heard a handful of staff had been grumbling about what, by most people’s standards, were still extraordinary pay packages. He called them into his office and told them that, since they were unhappy, they should “Just Go”.

Most of them packed their things and left the firm. But the next day one came back and said he had been misunderstood. My interlocutor said he hadn’t misunderstood him at all. The employee clearly felt he was worth more than he was paid. He should take his luck and go elsewhere as he clearly didn’t have his heart in his current job. He should “Just Go”. And he duly did.

These words “Just Go” stuck in my mind because financial services bosses use them far too rarely. My lunch companion was perhaps an exception because his family is a big shareholder in his firm. Most other bosses are stewards for shareholders – and normally not terribly good stewards at that.