Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

Continue Reading


Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

Continue Reading


Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

Continue Reading


RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

Continue Reading


China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

Continue Reading

Categorized | Economy

Athens and Rome expose EU faultlines

Posted on January 31, 2016

Italian Prime Minister Matteo Renzi (R) talks with European Commission President Luxembourg Jean-Claude Juncker before the arrival of Pope Francis at the European Parliament, on November 25, 2014. AFP PHOTO / POOL / PATRICK HERTZOG (Photo credit should read PATRICK HERTZOG/AFP/Getty Images)©AFP

European Commission president Jean-Claude Juncker, left, and Italian prime minister Matteo Renzi

How should we think about systemic risk in Europe today? The EU has been moderately successful at crisis management. But the ability to muddle through is reaching its limits when, as now, several crises intersect at once.

You can see the problem most clearly in Greece — a country battling both an economic meltdown and a refugee crisis — with not much help from the rest of the EU. Last week when the European Commission issued a report criticising Athens over its failure to control its borders, Macedonia took the unilateral decision to close its southern crossing with Greece — leaving thousands of refugees in transit on the Greek side of the border. In Athens, meanwhile,
parliament discussed pension reform, forced upon the country by their creditors as a quid pro quo for continued financial life support.

    Greece may be the starkest example, but it is not the only country facing overlapping crises. It is not even the most important one facing this dilemma. That would be Italy. While Rome’s problems are different from those of Greece, the country’s long-term sustainability in the eurozone is just as uncertain, unless you believe that its economic performance will miraculously improve when there is no reason why it should.

    Italy was overwhelmed by the increase of refugees from north Africa last year. On top of that it faces unresolved economic problems — no productivity growth for 15 years; a large stock of public sector debt that leaves the government with virtually no fiscal room for manoeuvre; and a banking system with €200bn in non-performing loans, plus another €150bn of debt classified as troubled. Then consider that
    its three main opposition parties have, at one time or another, all questioned the country’s membership of the eurozone. Even if none of them look like coming to power in the near future, it is clear that Italy only has a limited amount of time to fix its multiple problems.

    The struggle to repair the banking system is a good example of just how big the task is. Last week, the Italian government and the European Commission agreed a convoluted scheme to relieve the Italian banking system of some of these toxic assets. It uses all the dirty tricks of modern finance, including the infamous credit default swap, a financial product that mimics insurance against default on a bond, which was particularly popular during the pre-2007 credit bubble. These instruments allow investors to hedge against default risk. But more often than not, their true purpose is to conceal information, to fool investors, or to circumvent regulatory restrictions.

    In depth

    Europe’s migration crisis

    A migrant family walk toward the border after arriving at the railway station of Botovo, near the Croatian-Hungarian border, on September 21, 2015. Hungary has emerged this year as a "frontline" state in Europe's migrant crisis, with 225,000 travelling up from Greece through the western Balkans and entering the country from Serbia and most recently Croatia. Last week Hungary sealed its southern border with Serbia, forcing tens of thousands of migrants to enter Croatia, from where many then again crossed into Hungary and headed for Austria and beyond. AFP PHOTO / STRINGER

    The EU is struggling to respond to a surge of desperate migrants that has resulted in thousands of deaths

    There are no such evil motivations behind this structure in the case of Italy, but the idea that the country’s solvency crisis could be fixed through financial trickery is, of course, absurd. For me the scheme is less a symbol of devious financial engineering, than a sign of desperation. There was little else the Italians could have done under the EU’s tight rules on state aid.

    The European Commission previously blocked a proposal to create a classic “bad bank”, a state-owned company that would have bought the toxic debt directly from the commercial banks — thus giving them immediate relief. Doing so would have constituted illegal state aid under European law. The goal of the CDS scheme is more modest. It will bring no direct relief, but will help create an efficient market to sell some of this toxic debt over time. We should therefore expect the Italian banking system, and the wider economy, to continue to struggle.

    I shudder to think how Italy would cope with an additional shock of the kind Greece is experiencing after the Macedonian decision — a sudden inflow of immigrants from Syria. This might occur, for example, through further border closures on the Balkan route, which has been the preferred gateway for Syrian refugees on their way to Germany. Such a shift could see refugees divert via the Adriatic Sea to Italy.

    There are signs that Italy’s patience with the EU and Germany, in particular, is wearing thin
    . Matteo Renzi, prime minister, has been openly attacking the policies of the EU on energy, on Russia, on the fiscal deficits, as well as German dominance of the entire apparatus.

    It is not the euro crisis alone that has brought Italy to the brink of questioning its position in the eurozone. It is a combination of many crises and is likely to gain more momentum from the Brexit debate.

    There is an element of bad luck in this. Europe’s policy of muddling through, of doing the minimum required, and hoping to mop up the rubble later, might even have worked if the refugees had stayed at home. The EU’s mistake was not to have chosen a path that would lead to invariable ruin, but to render itself defenceless against the next unforeseen shock.