Breakingviews

Let News Corp keep BSkyB

By Chris Hughes

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

News Corporation should be allowed to keep its 39 percent stake in UK pay-TV group BSkyB. British MPs may be right when they say founder Rupert Murdoch isn’t “fit” to run News Corp and turned a blind eye to wrongdoing in its UK operations. But a regulatory review of BSkyB’s fitness to broadcast isn’t the place to remedy these failings.

The proven and alleged wrongdoings in News Corp’s UK newspaper business – ranging from phone hacking to bribing public officials – are grave. The immediate response should be criminal prosecution and dismissal of the individuals concerned. It doesn’t follow that media watchdog Ofcom should kick News Corp out of UK television.

True, News Corp’s handling of the newspaper scandal can’t be ignored. The company admits there was a local cover-up. For years, group management didn’t probe the UK subsidiary’s activities in spite of worrying evidence pouring into the public domain. This serious controls failure merits a response too. Shareholders, already sick at Rupert Murdoch’s cavalier approach to their strategic concerns, have rightly pushed News Corp to tighten its systems and change its culture. Securities regulators may also have an enforcement role: assurances that phone hacking was confined to one rogue reporter were misleading.

Ofcom’s specific task is to consider whether “any relevant misconduct” by the individuals who control BSkyB’s broadcasting licence means they are not “fit and proper” to do so. That test would be applied to Rupert and James Murdoch as News Corp chief executive and deputy chief operating officer. Ofcom might consider that their supervisory failings meant misdeeds at BSkyB could be covered up as easily as they were at News International. But history shows that its primary concern is, rightly, whether a News Corp-controlled BSkyB would continue to respect UK media regulation. It’s hard to say BSkyB wouldn’t.

The political noise in the UK surrounding News Corp may make it harder for Ofcom to be impartial. But the watchdog is supposed to be independent. However much one may dislike the Murdochs, that’s no reason to undermine the integrity of a regulatory framework which makes Britain a good place to do business. Ofcom must think straight – and do what’s best for viewers.

Saudis wouldn’t gain much from a union with Bahrain

By Una Galani

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Saudi Arabia’s call for Gulf nations to combine into a single entity appears to lay the ground for some kind of union with Bahrain. King Abdullah first highlighted the security issues facing the region when its leaders met in December – nine months after the kingdom sent tanks to tame a pro-democracy movement in Bahrain. Speculation is now swirling about how the relationship between the strongest and weakest members of the six-nation bloc could evolve, ahead of a meeting of the Gulf Cooperation Council this week.

The old idea of a Gulf union has taken on a new meaning after the Arab uprisings. Saudi Arabia hasn’t given any details on what it envisions beyond the existing cooperation on security and selected financial issues. But the six Gulf countries won’t easily set aside their political differences just to please each other. And plans for a Gulf monetary union, loosely based on the European model, appear to be stuck following the intention of the UAE and Oman to opt out.

That leaves the focus on Bahrain and Saudi Arabia, which already share strong links. As well as underwriting security of the island state, the house of Saud already partially bankrolls its finances. Bahrain gets roughly 150,000 barrels per day of oil from the offshore Abu Safah field, operated by Saudi Aramco under a decades old agreement. The revenues generated from its share of the field accounted for as much as 70 percent of Bahrain’s budget revenues in 2010.

A full fiscal union would help Bahrain lower its borrowing costs. Even with current Saudi support, it may run a budget deficit at four percent of GDP this year. The IMF estimates Bahrain’s gross public debt is around 40 percent of GDP. Total foreign debt is almost 15 percent. Bahrain’s gross domestic product is barely five percent of that of the two kingdoms taken together.

But a union formalising the status quo carries risks that don’t make it worthwhile. A pre-emptive move would pour fuel on the flame of the protests. It would also antagonise Iran, which once laid claim to the majority Shi’ite island. Any transfer of Saudi social austerity would also kill Bahrain’s raison d’etre among the Saudi businessmen and expatriates who escape to Manama to relax. Saudi rhetoric paves the way for a stronger union in the event that Bahrain’s regime is overwhelmed – but in that case, union would be just a name for annexation. In the meantime, the move isn’t worth the bother.

U.S. mortgage lessons lost in student debt policy

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The lessons of the U.S. mortgage crisis seem to be lost on policymakers tackling student debt. A decade ago, government subsidies and guarantees helped expand the “dream” of homeownership to many Americans who would have been better off renting. Today, it’s college education being made more accessible with cheap funding provided by Uncle Sam.

The U.S. Congress, which rarely agrees on anything these days, is achieving quick consensus on the matter. Without action, interest rates on student loans, which are unsecured, are set to double in July. But lawmakers have been scrambling all April to find a way to collect more revenue or cut spending to maintain subsidies and keep the rates down.

The effort is all too familiar. Government mortgage guarantees, accompanied by encouragement to make the American Dream available to lower income and less creditworthy borrowers, sent home prices soaring at an inflation-adjusted annual rate of 8 percent over the decade ending when they peaked in late 2006, according to Yale economist Robert Shiller, whose name adorns a closely watched home price index.

The price of college has been growing near that rate for even longer, according to College Board data. Over the past 30 years, private nonprofit college tuition and fees, after adjusting for inflation, have increased 6 percent annually. Public university prices have grown at 9 percent.

Like homeownership, college education has been exploited as a moral good. Anyone aspiring to earn decent wages needs a degree these days. Even jobs that haven’t traditionally required such academic training, like police work, now do. This shift has pushed the average student loan balance up by 25 percent annually over the last decade, according to finaid.org. These debts now exceed $1 trillion, more than even enthusiastic U.S. consumers have accumulated on their credit cards.

Ultra-cheap loans too often encourage young adults to start their working lives with excessive debt. And it’s the federal guarantees that prime the pump. To curb the unsustainable growth in higher education costs requires scaling back the government’s involvement. There’s still some time to keep student debt from turning into a mortgage-like crisis, but probably not much.

Fed’s rising growth, falling inflation are wishful

By Martin Hutchinson The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Ben Bernanke seems to be just hoping for the best. Wednesday’s Federal Open Market Committee statement talks about a pick-up in growth even as inflation declines from the current run-rate above the Federal Reserve’s 2 percent target. These trends aren’t apparent from recent data, and the U.S. central bank needs contingency plans if things don’t pan out so conveniently.

The Fed’s expectation that growth, though now subdued, will gradually build seems inconsistent with the latest report on U.S. durable goods, which showed orders down 4.2 percent – and with relatively weak employment data for March. Furthermore, Fed Chairman Bernanke acknowledged the headwind facing the U.S. economy with the expiry of tax cuts enacted in 2001 and 2003 and the start of spending cuts mandated by the debt ceiling deal in Congress last August.

On the inflation side, inflation measured using personal consumption expenditures was 2.3 percent in the year to February and core PCE inflation, excluding food and energy, was 1.9 percent. The FOMC’s forecast, which ranges upwards to about 2 percent, appears optimistic particularly as quickening growth would normally lead to an acceleration in inflation.

Energy prices could provide a caveat. If oil gets cheaper in the United States, joining domestic gas whose price has been torpedoed by a glut, the U.S. economy could benefit beyond the energy sector, restoring manufacturing jobs and reducing costs in energy-intensive industries. But encouraging large-scale oil drilling isn’t Bernanke’s turf, even if it might help vindicate the Fed’s forecast.

That means the Fed needs contingency plans to deal with lower-than-anticipated growth or unexpectedly high inflation. It’s notable that 10 out of 17 FOMC participants (not all of whom vote each year on policy) expect the federal funds rate to be 1 percent or higher by December 2014 – suggesting that the Fed commitment to keeping rates below 0.25 percent until then is already fading, in reality if not yet on paper. That’s a welcome hint of needed policy flexibility at an uncertain time.

Murdochs’ UK political friendships backfire on all

By Chris Hughes 

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Murdochs’ UK political friendships are backfiring on all concerned. Fresh revelations about the media moguls’ relationships have created new uncertainty over News Corp’s part ownership of UK satellite broadcaster BSkyB. They also have the potential to throw the UK’s coalition government into a full-blown crisis.

James Murdoch’s appearance before the UK’s Leveson enquiry into media standards on April 24 was his first grilling by an experienced lawyer on phone hacking, and it showed. But while there were some awkward moments, the questioning did not reveal any telling new evidence that Murdoch knew more about phone hacking at the News of the World than he has previously admitted.

The shocks came when the lid was lifted on contacts between the government and News Corp after the media group bid to buy out BSkyB. It’s hardly surprising that a large corporation might seek to influence the approval process for a big deal. But the reams of detail, mainly email correspondence, appear to go far beyond procedural enquiries and routine advocacy.

To re-cap, in 2010 News Corp launched a bid for the 61 percent of BSkyB it did not already own, just after the UK election. A government minister was meant to rule in a “quasi-judicial” capacity whether the move would damage media choice in the UK. Evidence heard on April 24 clearly indicates that the process was politicised from the outset. News Corp seems to have been aware of government thinking on the bid, and was getting favourable nods about the bid’s chances of success. Add in the context that Murdoch papers switched their political allegiances to support the Conservative party before the 2010 election, and the smell gets worse.

The developments make it harder to see News Corp making a successful second bid for full control of BSkyB – which is almost certainly still a long-term ambition. Moreover, they may make it easier for Ofcom, the media regulator, to conclude that News Corp no longer satisfies the “fit and proper” test than must be passed to be a major shareholder in a broadcaster – ultimately triggering a sale of its existing holding.

Dutch government felled by austerity boomerang

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

“Wie boter op het hoofd heeft, moet uit de zon blijven.” The Dutch proverb is particularly appropriate for the country’s right-of-centre government, which has collapsed after failing to agree big budget cuts. In English, it reads: “He who has butter on his head must stay out of the sun”.

Not long ago, the Dutch were among the hardest of hardline enforcers of budgetary discipline in the euro zone. As the crisis intensified last autumn, the country’s prime minister and finance minister argued that states which failed to control their deficits should face external supervision, fines, or even expulsion from the single currency.

That commitment to fiscal rigour abroad has been undermined by domestic economics and politics. The Netherlands has been hard hit by the slowdown: growth went into reverse in the fourth quarter of 2011, and the International Monetary Fund expects the Dutch economy to be the only core euro zone country to endure recession this year. This puts the country at risk of breaching the euro zone’s deficit targets, and forced ministers to consider more austerity. But the planned cuts proved too harsh for the fragile Liberal-Christian Democrat coalition – and for Geert Wilders’ Freedom Party, on whose support the government relied. Elections now look likely, possibly as early as mid-July.

The latest ructions pushed the yield differential between Dutch and German 10-year government bonds to their widest level for three years. However, an immediate fiscal crisis looks unlikely. If opposition parties play ball, parliament could cobble together a budget for 2013 before the summer. This would help prevent a scolding from Brussels and the ratings agencies. And even if the deficit remains above the euro zone’s 3 percent limit the Netherlands, which has a debt-to-GDP ratio of only 65 percent, is a long way from joining the euro zone’s peripheral laggards.

A bigger concern is whether elections will lead to a new political consensus. Though support for Wilders has shrunk, opinion polls suggest that the left-wing Socialist Party, which has campaigned against the euro zone’s austerity policies, might become the second-biggest grouping in a new parliament. It could be a hot summer for Dutch butter.

Repsol has to fight Argentina’s oily expropriation

By Fiona Maharg-Bravo and Kevin Allison The authors are Reuters Breakingviews columnists. The opinions expressed are their own. Argentina’s leftist government is taking control of YPF, the oil and gas company 57 percent owned by Repsol of Spain. Worse, the state is nationalizing only Repsol’s shares. Stakes owned by Argentina’s Petersen Group, and other minorities, will escape the expropriation.

It’s not yet clear what price Argentina will pay for the shares, but given that a state tribunal will decide, it’s safe to assume Repsol will get a raw deal. Nor is this small beer for the Spanish company. YPF has accounted on average for 63 percent of Repsol’s oil and gas production since 2007 and has contributed nearly 30 percent of its group operating income, according to Société Générale estimates. What’s more, Repsol’s exposure to YPF is actually larger than it looks. Argentina’s Petersen group still owes Repsol $1.9 billion after it struck a deal to buy shares from the Spaniards. Petersen has relied on dividends from YPF to service the loan. Now Argentina may redirect these dividends into capital investment at YPF.

Fighting the expropriation will probably be an uphill struggle, though Spain’s government has already said it would defend its national interest. The EU has also expressed concern and this might carry more weight, since Europe is Argentina’s second biggest export market after Brazil.

If diplomatic pressure fails, Repsol could try the courts. A bilateral investment treaty between Argentina and Spain includes robust protections for shareholders. But Argentina has a history of flouting adverse judgments by international bodies. Just last month, the United States said it would suspend waivers on import duties for Argentine goods in retaliation for the country’s failure to pay more than $300 million in compensation awarded to two U.S. companies by international arbitrators.

Yet while Argentina’s naked power play may be overwhelming, Repsol should not just roll over. It has too much to lose. Besides, financial realities mean that Buenos Aires may be persuaded to soften its line. After all, it will cost billions of dollars a year to develop one of the largest reserves of shale hydrocarbons worldwide in Vaca Muerta. After this display, it is hard to see the Argentine state raising much cash from private sources.

Growth is the least of China’s three big worries

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

China’s present condition can’t be summed up in a few tenths of a percentage point. True, judged by the headlines, GDP growth of 8.1 percent in the first quarter of 2012 was a miss. Economists polled by Reuters expected 8.3 percent. Investors shouldn’t overthink it: growth is the least of China’s three big worries.

The slowdown is real, but well flagged. Premier Wen Jiabao set a target of 7.5 percent GDP growth for 2012, compared with last year’s realised 9.2 percent. Against that, the current reading is hardly shabby, and may improve. Getting banks to lend more is one recourse that has already begun, with loans reaching 1 trillion yuan in March. There are signs things are already ticking up – such as the inching up of electrical production in March, often touted as a “more reliable” measure of growth than GDP.

If investors want to worry about something, they should start with politics. The mysterious ouster of high-profile Chongqing party chief Bo Xilai, and the arrest of his wife on murder charges, suggests a rising political risk premium as China nears next year’s leadership change. There’s no sign of a political breakdown, but increased anxiety at the top could slow big reforms on major issues such as opening up restricted investment sectors or liberalising interest rates.

Fretters should also have an eye on the financial system. As with GDP, numbers mislead. China’s banks reported non-performing loans of just over 1 percent of their total books in 2011. But that’s unsustainable, even if accurate. The banking system is built on distortions that promote misallocation of capital, with lending guided more by policy, collateral levels and implicit government guarantees than by considerations of risk and return.

Not that GDP growth won’t present China with some thorny issues in 2012. Policymakers will soon have to decide, for example, whether they are happy to tolerate the inflationary pressures that come with using bank lending to stimulate the economy. And a political or financial shock would quickly make itself felt in the GDP figures. But the more complex China’s situation gets, the less useful one big number becomes.

Spain’s fiscal amnesty sends wrong message

By Fiona Maharg-Bravo

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Spain has a large underground economy and the country faces an uphill struggle to shrink its budget deficit to 3 percent of GDP in 2013. But Prime Minister Mariano Rajoy’s decision to allow a temporary, no-questions-asked fiscal amnesty is wrong on several fronts. It is desperate and will be ineffective. A better approach would be to beef up resources on tax inspection.

Spain is hardly the first country in Europe to try tapping its tax evaders. Italy raised 4.5 billion euros with a similar measure in 2009. Germany also had a voluntary disclosure programme in 2010, raking in about 4 billion euros in additional tax revenue, according to the OECD. Spain hopes to raise 2.5 billion euros by slapping a 10 percent tax on previously unreported income. That would imply an extra 25 billion euros in bank deposits, which would be helpful for Spain’s banks as well.

But the measure is risky because of the message it sends out. For a start, it might make tax-paying citizens feel cheated, after seeing their tax rate increased by the Rajoy government. This could jeopardise future tax compliance. The government should be familiar with these arguments. Only two years ago, while in the opposition, the ruling PP party said any fiscal amnesty would be “unjust and antisocial”.

What’s more, it is a one-off boost to the budget instead of a structural change. In any case, the measure could be ineffective. Tax evaders will think twice before repatriating money into a depressed economy with scant growth prospects.

To combat fraud, the government would be better off beefing up resources on tax evasion. The previous government said the fight against fraud had raised 10.4 billion euros in 2011. The tax inspectors’ union says that 72 percent of tax fraud is committed by the wealthy and corporations. They recommend reforming corporation tax (beyond the elimination of tax breaks already been announced by the government). Unión, Progreso y Democracia, a political party, estimates that fraud costs up to 80 billion euros in lost revenue each year. More creative ideas abound, such as prohibiting the circulation of 500 euro notes, the currency of choice in the black economy.

Bo’s fall reveals China’s cult of anti-personality

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Crowds still stream past the body of Mao Zedong, preserved in a mausoleum in the centre of Beijing. Deng Xiaoping, Mao’s successor at the top of the Chinese Communist Party, had his ashes scattered at sea. Later leaders have been even more modest. Bo Xilai, the son of a revolutionary leader and formerly a rising star in Chinese politics, seems to have thought that personality cults could make a comeback. He has been proved wrong.

Until a few months ago, Bo was widely expected to be promoted to the nine-member Standing Committee of the Communist Party’s Politburo, China’s ruling body. His aggressive leadership style was popular in provincial Chongqing. He was effective in promoting development and pro-poor policies alongside a mild Maoist revival involving songs, statues and a few slogans. But then came trouble involving his police chief and accusations of unfairness to local businessmen. On Tuesday, he was suspended from the Politburo and his wife was named a suspect in the murder of a British businessman.

The latest moves were completely logical, politically speaking, even if the strength of the various accusations is hard to judge. Bo had become so controversial that any lesser action would have made the Beijing leadership look divided. That group craves a show of unity among its members for fear obvious divisions would encourage dangerous economic and social discord among the Chinese people.

The ultimate meaning of Bo’s fall for China’s reform policies is unclear, perhaps unknowable. Even the self-promoting Bo’s ultimate fate is open to question. Most observers say he’s finished, but a few don’t rule out rehabilitation. Either way, ambitious politicians in China will learn from Bo’s experience. They’ll avoid showing off, keep closer track of their spouses and associates, and ensure any misdeeds are kept quiet and deniable.

Call it a cult of anti-personality. It won’t stop leaders and their relatives from taking corrupt advantage of power and connections. But if a bland bureaucracy is what’s needed to keep cautious progress from becoming paralysis, it provides a sounder basis for China’s stability and development than mini-Maoist celebrity.