Mario Monti pinned between two comedians
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Mario Monti is pinned between two comedians. Beppe Grillo, a professional comic and leader of Italy’s so-called second force, wants the country to quit the euro and default on its debts. Silvio Berlusconi is also toying with euroscepticism as he attempts a comeback. This makes it much harder for a technocrat prime minister to manage the crisis.
The phenomenal rise of Grillo’s Cinque Stelle movement has shaken up the political landscape. In two months, its support has shot up from 7 percent to 20 percent, according to SWG, the pollster. Grillo has benefited from disgust with the ruling class, in much the same way as Alexis Tsipras, the radical leftwing politician who almost won Greece’s last election. The Italian comic’s anti-politician message, which initially appealed mainly to people on the left, is now striking chords on the populist right.
Berlusconi’s centre-right PDL, which is supposed to be backing Monti, has been the principal victim of Grillo’s rise. Its support has declined from 25 to 17 percent. The former prime minister has therefore himself started suggesting that either Germany should quit the euro or Italy should bring back the lira.
If Monti had his own party, these shifts in popular mood might not matter too much. But he doesn’t. What’s more, an election must be held by next spring and there are even fears that Berlusconi may force an early one in the autumn.
Monti, who has lost momentum after a strong start as prime minister, may yet find a way of pushing through a second wave of reforms. But confidence in him has collapsed, from 71 percent when he took over from Berlusconi in November to only 33 percent now. Although he is backed by the centre-left PD, the country’s most popular party, he risks becoming a lame duck.
Fiscal cliff “Cialis plan” deserves firm support
By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The U.S. Congress seems mighty busy these days. Just last week, it hauled the nation’s top banker in for losing shareholders’ money and voted to hold the attorney general in contempt. So it couldn’t have been easy for Erskine Bowles to galvanize attention from legislators for a considerably more important endeavor.
The former Clinton White House chief of staff, whose name adorns a widely praised roadmap to fix America’s finances, has been circulating a credible contingency plan to address the upcoming fiscal cliff. Expiring tax breaks and spending cuts that kick in from the start of the year could sap $400 billion of disposable income from the economy. Wells Fargo economists predict the measures could plunge America into recession in 2013.
The best solution would be for Congress to work out a comprehensive fiscal bill ahead of the November election. Given the unlikelihood of that happening, Bowles is working on the next-best thing: turning the 65-page report of the National Commission on Fiscal Responsibility he authored with retired Senator Alan Simpson into legislation that can be enacted by a lame-duck Congress.
It would stave off the more draconian elements of the fiscal cliff until, say, July 4 of next year. Importantly, it would provide the framework for a grand bargain between the next Congress and the newly elected president. If crafted correctly, it might even forestall a U.S. credit downgrade.
Bowles met with dozens of legislators last week and plans to submit the scheme to the Congressional Budget Office for scoring. And while there’s probably not enough support yet to ensure passage, Bowles is counting on two powerful forces. The first will be business leaders. The idea is making the rounds on Wall Street and has been praised by BlackRock boss Larry Fink, among others.
The more important force is one that builds as the cliff approaches: fear. Congress may be engaged in partisan political fights today. As the moment of truth nears, however, having a way to combat dysfunction when it’s needed will be critical. It’s not for nothing that Bowles calls it the “Cialis plan.”
Regulator grudge match redux: Geithner vs Bair
By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Get ready for round two of the “Bair versus Geithner” sparring match. Sheila Bair may no longer run the FDIC, but she has formed an independent group to push forward reforms in the U.S. financial system. The primary pressure point will be the council of regulators led by Treasury Secretary Timothy Geithner. While the two have tangled before, their interests are now aligned.
Bair’s Systemic Risk Council, a sort of Justice League of once-superstar watchdogs, wants to ensure financial reforms introduced as part of the Dodd-Frank Act will actually get implemented. The bipartisan group includes former heads of nearly every major regulator, along with economists, bankers, and retired senators.
Some of its goals are fairly uncontroversial. The body wants the Office of Financial Research to beef up its data collection and analytics system and for global regulators to share data. But others aren’t so simple. For instance, the group is calling for a quick resolution of the complex Volcker Rule, the new bank capital framework and derivatives market reforms.
The Systemic Risk Council holds the Financial Stability Oversight Council, the prudential oversight body consisting of head federal regulators, responsible for delays in making this happen. According to Bair, the council, or FSOC, hasn’t exhibited the leadership needed to get things done. Geithner sits at the head of its table, making him Bair’s implicit target.
Bair, a Republican appointee, and Democrat Geithner have clashed before. During the 2008 crisis, then-New York Fed President Geithner wanted regulators to use whatever means necessary to stabilize the system. To protect the FDIC’s insurance fund, Bair fought against bailouts she considered too lenient. She was also instrumental in helping Wells Fargo take over Wachovia, scuppering a previously agreed deal with Citigroup that Geithner helped engineer.
In the present situation, Bair and Geithner should have common cause: to finalize financial reforms. That doesn’t mean there won’t be friction. As Bair surely appreciates, in the face of bureaucratic inertia and intense external lobbying these things are easier said than done. But at least until Geithner steps down at the end of the year, the match-up offers a more constructive replay of some of the more tense moments of the crisis.
Japan’s retiree raid augurs political paralysis
By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Japanese Prime Minister Yoshihiko Noda has wrangled a deal with the opposition to double the consumption tax and whittle down government debt, which is already double GDP. On paper, it’s a good start. In Japan’s toxic political environment, though, it’s a big risk. Because the tax hike will hit the country’s growing population of retired voters, the bill’s passage – or indeed failure – could wind up costing Noda his job. That would derail other reforms needed to avoid a sovereign debt crisis.
Japan has two big concurrent problems: its debt is growing while its population is shrinking. The government’s 959.9 trillion yen ($12 trillion) of debt has doubled in the past 15 years, and, net of Japan’s overseas lending, now amounts to around 125 percent of GDP. Thanks to longer life spans and falling birthrates, its population is aging – nearly 1 in 4 Japanese are 65 or older – and shrinking. The number of Japanese declined by 0.2 percent last year and is on course to shrink a third by 2060. It could face a Greek-style fiscal crisis much sooner, when more retirees begin drawing down on their savings, which today finance the country’s borrowing.
Raising income taxes isn’t likely to be particularly effective in a country where a large and rising segment of the population no longer works.
Doubling the sales tax could cut net debt by 2.5 percent of GDP by 2020, the IMF estimates. But that’s not enough to keep it from rising. For that, Japan needs to raise the consumption tax rate to as high as 15 percent as well as cut corporate taxes, increase the retirement age and reduce tax and pension exemptions for housewives.
None of these options will appeal to aging or already-retired voters. Opposition politicians appear to have won a promise from Noda’s party for snap elections in return for their support. But rebel party members on both sides of the aisle may scuttle the deal, forcing Noda to call elections. Either way, the read for markets is bleak: no Japanese government looks capable of staving off the country’s coming fiscal nightmare anytime soon.
State meddling won’t solve UK bubble-pricking bind
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
George Osborne is exerting his influence on the Bank of England. Britain’s Chancellor of the Exchequer has decided that the central bank’s new Financial Policy Committee must support government policy. That raises questions about the FPC’s ability to bust financial bubbles. But it won’t change the committee’s current dilemma: how to combat excessive risk-aversion.
Before the crisis, the British central bank obsessed about controlling inflation, while bank supervisors worried about individual lenders. Neither was able – nor willing – to tackle the huge credit bubble that eventually caused a severe recession. In response, the authorities created the FPC to take charge of “macro-prudential” policy.
Right now, financial bubbles are hardly the leading threat in the UK’s financial sector. Banks and the economy are suffering from excess caution, not exuberance. Regulators are unsure what to do. As Donald Kohn, the former Federal Reserve governor who sits on the FPC has pointed out; it’s easier to take the punch bowl away from a party that is getting out of hand than to spike the punch to get the party going. The tension is clear in the almost contradictory stance of the FPC towards bank capital and liquidity buffers. It has both urged banks to rebuild them and suggested they could be run down to counter economic weakness.
Enter the UK government. Osborne announced last week that the FPC would be given a secondary objective of supporting government policy. That has set alarm bells ringing: could the FPC act to rein in a future housing bubble if, say, the government had an explicit policy of promoting home ownership?
These fears may be overblown: the Monetary Policy Committee, which sets interest rates, is already required to support government policies, provided they do not conflict with the goal of maintaining stable prices. And Osborne is right that policies which maintained financial stability but choked off economic growth would be perverse.
Dimon double gives Congress wasteful distraction
By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
America’s federal lawmakers need to get their priorities in order. Politicians from both chambers of Congress spent four hours over the past week publicly grilling JPMorgan boss Jamie Dimon. But they have far more pressing work to do.
Sure, Congress has a crucial role to play in ensuring the country’s banks are well supervised. And JPMorgan’s $2 billion-plus portfolio hedging loss does raise questions about risk management, the Volcker Rule and whether mega-banks like JPMorgan remain too big to fail.
But the bank’s Chief Investment Office debacle has not put the firm in danger – let alone trigger any emergency assistance from taxpayers. Even if the loss took a $3 billion chunk out of JPMorgan’s net income, that would still leave it cranking out more than $15 billion this year. And it has had no effect on liquidity or capital.
That makes it primarily an issue for regulators and the bank’s shareholders, who have seen $20 billion in value wiped off the firm’s stock since the loss was announced in early May.
But lawmakers could not resist indulging in some good old politicking. Representative Barney Frank, among others, tried pushing Dimon to admit that regulators need the funding that the Republicans want to cut. Fellow Democrat Representative Maxine Waters characteristically muddled matters, asking whether a “drop in share value affected shareholders in the U.S.” – and whether the trades were put on in London to avoid U.S. watchdogs, even though the office is overseen by American regulators.
GOP members took the opposite track, as Representative Jeb Hensarling tried to cajole Dimon into supporting regular bankruptcy for financial firms over the government’s new non-bank liquidation authority. Others stressed that the 2010 Dodd-Frank Act wouldn’t have prevented the loss.
If looks like a proprietary bet, sounds like a proprietary bet and stings like a proprietary bet, the house was betting alright.
But nobody can spin it better than Jamie.
He would do well in politics, for sure.
Spain won’t be saved without grand master plan
By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Avoiding the great Greek scare hasn’t allowed the euro zone to breathe a sigh of relief on Spain. Yields on the country’s 10-year bonds are now reaching 7.2 percent. The Spanish government has already done a lot. The extra steps it could take are of marginal importance in the current context.
Markets aren’t listening to Madrid. What matters is that the euro leaders come up with a credible road map to overhaul monetary union at their end-of-month summit.
It’s time to end the alphabet soup – plan A, plan B etc – and come up with a grand plan. The euro leaders’ collective fault is to have let markets even imagine that Spain could be bailed out – or even that it could possibly leave the euro. If they don’t want either to happen, they must act fast.
What is needed is a powerful message that the euro zone is integrating, not disintegrating. It may start with the launch of a fully-fledged banking union, as Mario Draghi and French President François Hollande advocate. It will not happen overnight. Angela Merkel doesn’t think it is possible without a fiscal and even a political union: this should be a good incentive for the French president to accept the type of sovereignty transfers that France has historically refused – even if the price is that some structural reforms might be forced on his government.
The second challenge euro zone leaders must tackle is the consequence of austerity on the region’s economy. Greece, Ireland, Portugal and Spain are bleeding. No one advocates that their governments should stop cleaning up their budgets. But indiscriminate spending cuts hurt demand, and income tax hikes hurt competitiveness. More time will be needed to reach the fiscal targets agreed. There is no avoiding that basic fact. And the ECB may want to confirm its hints that it is ready to lower its key interest rates next month.
Greek vote is a cause for relief but not rejoicing
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The Greek vote is cause for relief but not rejoicing. The Greeks have bought themselves a breathing space by voting for pro-bailout parties. But the resulting coalition may be weak, and the economy is still shrinking, and markets are still sceptical about the euro zone’s ability to find a comprehensive solution to the crisis.
Greece’s immediate challenge is to form a government. The centre-right New Democracy party, which came first, got only 129 out of 300 seats with 29.7 percent of the vote. Fortunately, the rest of the euro zone is piling on the pressure for a stable government to be formed fast, and that message seems to be getting through. The capacity of Greek politicians to wrangle shouldn’t be under-estimated. But the likelihood is that Antonis Samaras, New Democracy’s leader, will become prime minister, supported by the centre-left PASOK and the smaller pro-euro Democratic Left party.
Such a coalition could count on 179 MPs supported by nearly half the popular vote. But it wouldn’t be strong. Samaras isn’t a popular figure, even in his own party. He would need to bring the country back on the austerity path. And he would be harried all the way by the radical left SYRIZA party, which came a close second in the election and wants to tear up the bailout plan.
The rest of the euro zone will want to help Samaras by giving Greece extra time to hit its budget targets and by promising more investment. A rapid disbursement of the next tranches of bailout money, especially to complete the recapitalisation of banks, is possible. But the scope for help shouldn’t be exaggerated. Germany will not show leniency on the need for structural reforms, such as cracking down on tax evasion and slimming down the civil service. And any extra time (which of course means extra money) will be needed just to make up for the fact that the economy has worsened further during the months of electioneering.
The Greek problem could easily rear its ugly head again in a few months. With Spanish 10-year bond yields back above 7 percent and Italian ones over 6 percent early on June 18, the rest of the euro zone must brace for the shocks ahead.
I am sorry to say but it is totally irrelevant what is happening in Greece.
It makes for good theatre but the situation is close to sitting at the bedside of a terminally ill patient, and when there is a flicker of the hands or face the family members become excited about possible recovery or healing, while the true diseases keeps eating the patient from the inside as no proper diagnosis or cure was established.
The problem we are facing is a global problem.
Our whole way of life, the constant quantitative growth economic model, and the political establishment serving it has driven us into a dead end since it was always unnatural and unsustainable, and now the whole structure started to become self destructive.
We behave like cancer in this global, interconnected and interdependent human network with our insatiable appetite for more, way above necessities and means, alway gaining at the expense of others, climbing higher by trampling over the rest and the environment around us.
Now there is nowhere else to go, but we still try stubbornly adjusting, restricting or stimulating without any true purpose, simply waiting for the miracle of “return to growth”.
Until we honestly start examining ourselves why we are where we are and what our conditions are in this new reality, we will keep sliding closer and closer to the edge.
Five ways to hedge against a China slowdown
By Wayne Arnold
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
It’s no surprise Hu Jintao, China’s president, wants to talk up his economy. He spoke about continuing robust growth over the weekend as he headed for the G20 summit in Mexico. But the latest data showing city house prices down 1.5 percent, along with tumbling industrial production, suggest a slowdown.
Few doubt the world’s second-largest economy will keep growing. The question is how fast. Cautious investors have already punished stocks that rely on China growing rapidly, like Australian copper miner PanAust, which has fallen 19 percent in the past four months, and South Korean construction equipment maker Doosan Infracore, which has lost 23 percent since March 13. But there are still trades that offer protection for investors who don’t buy the party line.
First come put options on the Australian dollar. The currency is a proxy for China’s growing appetite for resources, and puts could pay big if that demand softens. Morgan Stanley estimates the Aussie could drop as much as 15 percent if China’s economic growth slips below 5 percent a year.
A similar logic applies to Taiwan dollar puts. This time the currency serves as a proxy for expanding investment and tourism in China, which would probably suffer if growth slows sharply.
Hedge number three is Korean credit default swaps. China is Korea’s largest export market, so the cost of insuring government bonds against default would rise if exports slowed, pressuring Korea’s current account balance and government finances.
BoE can’t blame Europe for its monetary U-turn
By Peter Thal Larsen
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Reality is catching up with Mervyn King once again. After months of resistance, the governor of the Bank of England has announced plans to channel subsidised loans to British borrowers and pump extra liquidity into banks. The overt justification for the U-turn is to pre-empt a storm from Europe. But King can’t lay all the blame on the euro zone: many of Britain’s woes are self-inflicted.
The central bank has slashed interest rates and pumped 325 billion pounds into the economy through quantitative easing. Yet bank funding costs remain high and credit tight. This is particularly painful for consumers and small businesses, which have few alternatives to bank finance.
So the BoE is to offer banks up to 80 billion pounds in multi-year loans at below-market rates, secured against loans to the British economy. Not for the first time, the government will indemnify the central bank against subsequent losses. The BoE will also conduct monthly auctions of six-month liquidity to ease funding strains.
Without the hard details, it’s hard to say whether the “funding-for-lending” initiative will work. But it will test the view of many bank executives that falling lending reflects a shortage of demand, not a lack of supply. Extra liquidity is of course welcome, even though the size and duration of the BoE’s programme falls well short of the European Central Bank’s operations.
King is wrong to blame problems entirely on the euro zone. Though turmoil on the continent has undermined economic confidence and rattled markets, government austerity and the UK’s still-large private debt burden are an added drag. Regulation hasn’t helped either: King’s plan for taxpayer-subsidised loans coincided with the government publishing new rules designed to limit future bailouts. Though the reforms make long-term sense, they will hardly make bank credit cheaper.
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