Opinion

Hugo Dixon

Greek rebound is astonishing

Hugo Dixon
Apr 8, 2014 10:01 UTC

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent.

Two of the country’s big four banks – Piraeus and Alpha – have raised 3 billion euros of equity between them in recent weeks to reinforce their balance sheets after a stress test orchestrated by the central bank. Eurobank, another big lender, is planning to follow suit with a 3 billion euro issue later this month.

The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Europe’s post-crisis challenge

Hugo Dixon
Dec 16, 2013 10:28 UTC

The hot phase of euro crisis may be over. But the zone will limp on for years with low growth and high unemployment unless further action is taken on three fronts: bank balance sheets must be cleaned up, monetary policy loosened and more free-market reforms adopted.

The latest news from the euro zone’s various battlefronts is fairly encouraging. GDP in all the problem countries, with the exception of tiny Cyprus, is expected to grow next year. Budget deficits, one symptom of the crisis, are being cut. Current account deficits, the other main symptom, are coming into balance.

Ireland, the poster child of the harsh recipe of fiscal austerity plus structural reform, has just exited its bailout programme. Portugal may do so next year. Even Greece is toying with the idea of issuing government bonds towards the end of 2014.

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.

Turkey’s economy is vulnerable

Hugo Dixon
Jun 17, 2013 10:06 UTC

Tayyip Erdogan seems to like the concept of “choking” things. At the weekend, Turkey’s prime minister sent riot police into an Istanbul park with tear gas and water cannons to clear out the protestors. A week earlier, he had threatened to “choke” an alleged “high-interest-rate lobby” of speculators who wanted to push interest rates up and suffocate the economy.

Erdogan’s harsh actions against protestors and harsh words against investors could backfire economically. The country depends on foreign investors to fund its big current account deficit. If they turn tail in response to the mounting unrest, interest rates will indeed have to rise.

The protests which began two weeks ago over Tayyip Erdogan’s alleged authoritarianism, triggered by the prime minister’s insistence on bulldozing one of Istanbul’s few public parks, initially alarmed investors. The stock market plunged, the lira fell and government bond yields spiked. Then, after the central bank intervened in the foreign exchange market and Erdogan offered concessions last week, investors calmed down.

Italy could do with market pressure

Hugo Dixon
Apr 15, 2013 09:34 UTC

Italy could do with some market pressure. Rome’s bond yields are now lower than they were before February’s inconclusive election. But as the politicians scheme, the economy burns. With markets calm, there is insufficient urgency to crack on with long-needed economic and political reform.

The fall in 10-year bond yields, which were 4.3 percent on Friday compared to 4.4 percent just before the election, is attributable to two factors. First, nobody wants to bet against the European Central Bank which has promised to do whatever it takes to preserve the euro. Second, the Japanese central bank’s pledge to buy gigantic quantities of bonds at home has buoyed asset prices elsewhere, including in Italy.

The backdrop to the current political crisis is starkly different to that in November 2011, when a sharp increase in bond yields created a panic which led to Silvio Berlusconi being forced out of office. Now none of the three main political blocs – Berlusconi’s centre-right group, the centre-left Democrats and Beppe Grillo’s 5-Star Movement – can govern on its own. But seven weeks have been wasted without a coalition being formed.

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.

Markets too sanguine about Italy

Hugo Dixon
Mar 11, 2013 10:12 UTC

The markets are too sanguine about Italy. The country’s politics and economics are messed up – and there are no easy solutions. And while Rome does have the European Central Bank as a backstop, it may have to get to the brink before using it.

Investors had jitters after last month’s election result, pushing 10-year bond yields up to 4.9 percent from 4.6 percent. But by last Friday they had fallen back to 4.7 percent. Investors have convinced themselves that some political solution will be cobbled together; that, if one isn’t, it doesn’t really matter; and that, if the worst comes to the worst, the ECB will pick up the pieces by buying the country’s bonds.

Mario Draghi, the ECB president, gave some support for the latter two ideas last week. He downplayed the risks to Italy’s fiscal position by arguing that much of the country’s belt-tightening was on “automatic pilot”. He also made clear that the ECB’s bond buying plan was still available for countries that followed the rules.

Bersani may not be bad for Italy

Hugo Dixon
Dec 3, 2012 10:22 UTC

The last Italian prime minister whose surname began with a “B” – Silvio Berlusconi – was a disaster. The country’s next leader’s name is also likely to start with a “B”.

Investors want Mario Monti, the technocrat who took over from Berlusconi last year, to stay as prime minister after the election, which will probably be in March. But they are more likely to get Pier Luigi Bersani, leader of the left-wing Democratic Party (PD). While there are risks, such an outcome may not be as bad as it looks – not least because Bersani has promised to continue with Monti’s policies and was one of the few reformers when Romano Prodi was prime minister in the last decade.

Trade union-backed Bersani will be the standard-bearer for the left in the coming elections after winning a decisive primary at the weekend against Matteo Renzi, the modernising mayor of Florence. His first comments were promising: he said the PD would have to tell Italians the “truth, not fairy-tales” about the country’s grave economic situation.

Battle against Grexit far from won

Hugo Dixon
Nov 26, 2012 10:15 UTC

The battle against Grexit – Greece’s exit from the euro – is far from won. Assume Athens is promised its next 44 billion euro tranche of bailout cash and some further debt relief when euro zone finance ministers reconvene on Nov. 26. Even then, the banks will still be hobbled, while another round of austerity is in the works and vested interests are rife.

It will be hard to restore confidence and, without that, there won’t be a return to growth. Meanwhile, without growth, Antonis Samaras’ fragile coalition government will fall. Alexis Tsipras’ radical left SYRIZA movement would then probably take over – plunging the country into a new hot phase of the crisis. What’s more, if investors and consumers fear such a scenario, they won’t start spending – making a continuation of the slump self-fulfilling.

Samaras, who became as prime minister in June, has been better than many feared. His strategy has been to do everything demanded of Greece by the “Troika” – the European Commission, the European Central Bank and the International Monetary Fund – with the aim of changing the perception that Athens cannot be trusted.

World needs healthy capitalism

Hugo Dixon
Oct 29, 2012 09:25 UTC

Last week I gave a speech on “healthy capitalism” at Oxford University. Before doing so, I tried the idea out on an academic friend of mine. He scoffed at it. For him, “healthy capitalism” was an oxymoron. Five years after the start of the world’s worst financial crisis in decades, it is easy to mock capitalism. The system ran amok – leading to debt, unemployment and shrinking economies.

But that’s precisely why the world needs healthy capitalism. Health involves vigour, well-being and resilience. Capitalism – with its basis in free enterprise and private property – can have all those qualities provided warped incentives are corrected and the culture of greed is tempered. State socialism certainly cannot. The practical alternative is to reform capitalism not throw it away.

But how should it be reformed? After the tribulations of recent years, the conventional wisdom is that the problem has been too much freedom. That, though, is a misdiagnosis. Most of the diseases that have become apparent during the crisis have been caused by a distortion of free enterprise rather than too much freedom.