Opinion

Hugo Dixon

How Greece can turn vice to virtue

Hugo Dixon
Apr 14, 2014 09:27 UTC

Most Greeks know the expression vicious cycle – or favlos kyklos. But when you ask them the Greek for virtuous cycle, they often struggle to find the term, or even deny it exists.

After six years of recession that have shrunk the economy by a quarter and left Greece with an unemployment rate of 27 percent, it is not surprising that vicious cycles loom large in the national psyche. But there is a Greek expression for virtuous cycle – enaretos kyklos – and the country may be beginning to enjoy one.

Athens returned to the bond market last week with the issue of 3 billion euros of five-year paper. The country’s banks are also able to raise equity on the market.

The challenge now is to take this positive momentum in financial markets and use it to build on the tentative signs of recovery in the real economy. Confidence can be infectious. It is not just financial investors who are giving Athens the thumbs-up. So are Greece’s euro zone partners, led by Germany’s Angela Merkel, who was in Athens last Friday.

The main channel through which a virtuous cycle could operate is investment, which will create the badly-needed jobs. As Greek banks find it easier to fund themselves, they will start supplying more credit to local companies, which have been starved of cash. Foreigners are also starting to invest now that Greece has lower wages and cheaper property.

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.

Spain’s recovery clouded by politics

Hugo Dixon
Apr 7, 2014 09:40 UTC

Spain’s recovery is clouded by politics. Mariano Rajoy has achieved a lot in the two years that he has been prime minister. Growth has finally returned; even unemployment is falling. But as Spain enters a new electoral cycle, the appetite for reform is waning. What’s more, there is a big question mark about what will happen after the next election, which has to be held by March 2016.

Rajoy cannot claim the lion’s share of the credit for Spain’s economic turnaround. That belongs to Mario Draghi, president of the European Central Bank, whose “do whatever it takes” speech in mid-2012 marked the beginning of the end of the euro crisis.

However, Rajoy’s centre-right government has doggedly pursued reform. Most important, it has liberalised the labour market and cleaned up the banks. As a result, competitiveness has been restored and exports are booming.

Europe should give Cyprus a hand

Hugo Dixon
Mar 17, 2014 10:51 UTC

Sunday marked the anniversary of Cyprus’ shock plan to raid the tiny island’s bank deposits. The envisaged tax, backed by the euro zone, covered all banks and all deposits, whether insured or not.

Although that unwise scheme was later rescinded, much damage was done to a country already deep in financial crisis. Uninsured deposits of the island’s two large troubled lenders still suffered big haircuts. Capital controls were imposed as well.

These restrictions were supposed to be a short-term measure, not that this ever seemed likely. A year on, the most important controls – preventing people or companies taking more than small sums of money out of the country – are still in place and depressing the economy’s animal spirits.

EU’s half-baked bank union could work

Hugo Dixon
Mar 10, 2014 16:12 UTC

The European Union’s half-baked banking union could be made to work – even though it wasn’t strictly needed to solve the euro zone’s problems and what has been agreed isn’t what the designers wanted.

The original advocates of banking union saw it as a way to prevent the euro collapsing during the dark days of early 2012. The idea was that a well-funded, euro-wide deposit insurance scheme would stop savers panicking. Meanwhile, if banks got into trouble, a strong euro-wide safety net would be able to bail them out.

During the crisis, savers and investors lost faith in the ability of weak governments to rescue their banks. That’s why banking union enthusiasts wanted euro-wide support systems.

ECB faces severest stress test

Hugo Dixon
Feb 24, 2014 10:25 UTC

A lot is riding on the cleanup of euro zone lenders being overseen by the European Central Bank. The progress so far is encouraging. But clarity is needed on a few points to ensure that lenders really do get a good scrubbing and are therefore able to support the zone’s fragile economic recovery.

The ECB is in the midst of a so-called comprehensive assessment of euro zone banks. This has two elements: an “asset quality review” (AQR) to determine whether the loans and other assets held on their balance sheets are valued properly; and a “stress test” to check whether they could withstand a severe economic downturn.

To pass the test, banks are supposed to have a “common equity Tier 1 capital ratio,” a measure of balance-sheet strength, of 8 percent in the baseline scenario; and a ratio of 5.5 percent in the adverse scenario. The whole exercise is supposed to be finished by October before the ECB officially takes over from national authorities in November as lead supervisor for the zone’s banks.

A workable euro zone fitness regime

Hugo Dixon
Feb 17, 2014 09:42 UTC

The euro zone has gone from the emergency room to rehab. As often with patients, the question is how to maintain a stiff exercise regime now the immediate danger is over.

Germany has an idea. At December’s summit, it got the rest of the zone to agree in principle to what are called “partnerships for growth, jobs and competitiveness”. The idea is that governments will sign contracts committing them to do things like reform their labour markets, liberalise product markets and improve the efficiency of their public sectors. Countries such as Greece and Cyprus, which are already in bailout programmes, wouldn’t be covered.

The snag is that the leaders haven’t yet been able to agree on what sort of carrot to give countries in return for signing these contracts. They have, though, set an October deadline to reach conclusions.

QE is the way for the ECB to go

Hugo Dixon
Feb 5, 2014 10:35 UTC

The European Central Bank needs to start taking the risks of deflation more seriously. This danger should be top of its agenda when its governing council convenes for its monthly meeting this week.

The ECB’s line is that it does not see deflation on the horizon. True, the inflation rate has been below the target of close to but below 2 percent for over a year. The flash estimate for January was a mere 0.7 percent. But this still amounts to rising prices – not deflation’s actually falling prices.

True, too, that the ECB itself expects inflation to be below target for at least the next two years. But it doesn’t think the euro zone is close to repeating the experience of Japan which has suffered 20 years of flat prices.

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.

Italy has two chances post-Berlusconi

Hugo Dixon
Dec 2, 2013 09:43 UTC

Italy seems continually condemned to disappoint. The economy has barely grown in 20 years. The younger generation is languishing without opportunity: youth unemployment stands at 41 percent. So many chances to reform the country have been wasted – and many by Silvio Berlusconi, who was finally expelled from the Senate last week after being convicted of tax fraud.

The country now has two chances to reform. The first is that Enrico Letta, the prime minister, will be emboldened to push through changes now that Berlusconi has been sent packing. If he still can’t, Matteo Renzi – who is expected to be chosen leader of the centre-left Democrats on Sunday – should force elections and show he is as radical in deed as he is in words.

Look first at Letta. He is an intelligent centrist from the Democratic party. But, since he became prime minister in April after an indecisive election result, he has not achieved much. This is largely because his government had to rely on Berlusconi’s centre-right party. The two groups found it virtually impossible to agree on anything.