Hugo Dixon

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

A deal was better than a disaster. But last week’s planned rescue of Greece has the astonishing by-product of increasing its debts. It also lets private creditors off lightly while making taxpayers elsewhere in the euro zone pay through the nose. It doesn’t even mark the end of the crisis.

True, the sustainability of the Hellenic Republic’s debt has been improved. Its government will receive 109 billion euros of new 15-30 year loans from the euro zone at an interest rate of only 3.5 percent. Private-sector creditors will also swap or roll over 135 billion euros of existing bonds into new longer-term instruments.

But this private-sector involvement comes at a huge cost. Because the European Central Bank put the fear of God into politicians about the consequences of a Greek default, private creditors have been handled with kid gloves. Sure, they are going to suffer 21 percent losses compared to the face value of their bonds (assuming a 9 percent discount rate). But that’s much less than the 50 percent haircut that is needed to put Greece’s finances onto a stable footing.

What’s more, the financial fiddling used to corral the creditors actually means Greece’s debt will rise. This is mainly because Athens will need to borrow 35 billion euros to buy collateral to partially guarantee the new bonds it will give its creditors.

The deal also envisages Greece borrowing 20 billion euros to buy back debt with a face value of 32.6 billion euros. The price, equivalent to 61.4 percent of face value, is another sweetheart deal for the creditors. A more muscular approach would have cut them to half face value.

Taxpayers in other euro zone countries, by contrast, are digging deep. Imagine they applied the same 9 percent discount rate that private creditors think is appropriate. Their new 109 billion euros of loans would be worth only 54 billion euros, according to a Breakingviews analysis. In other words, they are the ones taking a 50 percent haircut.

Taxpayers elsewhere might chip in, too, if the International Monetary Fund makes a contribution. But it would be surprising to see the Washington-based institution pay a third of the total bill as it did with Athens’ first bailout. Non-European countries, even the United States, are balking at the amount of money the institution is pouring into Greece.

Two factors could tilt the deal back in favor of the taxpayers and away from the private-sector creditors. First, the euro zone leaders hinted in their communiqué that Greece might be asked to give them collateral too. As well as providing taxpayers with protection, the collateral would give Greece an added incentive not to veer off its economic fitness regime. Given the length of the program and the fact that the Greek opposition has refused to buy into it, there is a sizeable risk Greece could stray.

Second, private-sector creditors will still be on the hook for 150 billion euros – or 115 billion euros once the collateral is subtracted. This means that, if and when it becomes apparent that Athens can’t bear its debts, it will be possible to give them another, more severe, haircut.

But even if these mitigating factors kick in, the deal is very much a second-best option. It would have been better to have done a full restructuring of Greece’s debts now. A forcible swap of all the private sector’s bond holdings, currently around 200 billion euros, at 50 percent of face value would have cut the need for new official funding to Greece to virtually zero.

In the Middle Ages, a common scam was to sell a cat in a bag while pretending it was a far more valuable pig. Buyers who didn’t look inside the bag first were conned. In those days, the word for bag was “poke”. Taxpayers outside Greece are being sold a pig in a poke.

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

By Hugo Dixon

LONDON (Reuters Breakingviews) – Reverse ferret is a term coined by The Sun, one of the Murdochs’ UK newspapers, to refer to an abrupt U-turn in editorial line. This article is a reverse ferret, or at least a partial one.

Last week I wrote that James Murdoch should not be kicked out of his position as chairman of BSkyB. I admitted that he hadn’t covered himself with glory in dealing with the scandal at the News of the World, which he indirectly managed. But I argued that this was a separate business and his track record at BSkyB was good.

Since that article appeared, Murdoch has given evidence to a committee of the UK parliament about the hacking scandal. Subsequently, part of his testimony was challenged by two former senior employees. If what the former employees say is correct, Murdoch would appear to have given false evidence.

Although Murdoch is standing by his testimony, there are enough puzzles for BSkyB’s independent directors to quiz him before confirming him as chairman, as planned later this week. It could be argued that there are so many other probes going on that the directors hardly need to launch their own. But this whole saga has been bedeviled by people failing to ask tough questions when they had a chance.

Moreover, the BSkyB directors are in a unique position to grill Murdoch. He can hardly brush them off.

The key question is how Murdoch explains the discrepancy between his evidence and that of the former employees on whether he was aware of a key email when he agreed a pay-off for one of the hacking victims. The email appeared to suggest that hacking was not confined to a single rogue reporter.

The follow-up question is why Murdoch authorised a payment, thought to be 425,000 pounds, given that outside counsel had advised that the victim would receive 250,000 pounds if the matter went to court. The select committee asked this question but didn’t get a satisfactory answer.

Murdoch may give perfectly good answers if BSkyB’s directors ask him. But if he is evasive, they should ask him to step aside.

CONTEXT NEWS

— BSkyB’s independent directors are likely to reconfirm James Murdoch as chairman of the pay-TV broadcaster when they meet on July 28, according to two people familiar with their thinking.

— Murdoch’s position has been questioned in the wake of the alleged phone-hacking and police bribery scandal at the now defunct News of the World, part of the News International newspaper group which he indirectly manages.

— Murdoch gave testimony to a House of Commons select committee on July 19 which has since been disputed by two former senior employees: Tom Crone, News International’s legal manager until earlier this month; and Colin Myler, the editor of the News of the World until it was closed also this month.

— They said in a statement: “We would like to point out that James Murdoch’s recollection of what he was told when agreeing to settle the Gordon Taylor litigation was mistaken. In fact, we did inform him of the ‘for Neville’ email which had been produced to us by Gordon Taylor’s lawyers.”

— Taylor is one of the News of the World’s hacking victims. The “for Neville” email appeared to suggest that hacking was not confined to a rogue reporter.

— Murdoch told the select committee that he had not been aware of the email when he agreed the settlement. He wrote to the select committee on July 22 saying: “I stand by my testimony.”

— Transcript of testimony to the select committee: here

(Editing by Robert Cole and David Evans)

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

Listen to the politicians and one might think that Greece’s debts will fall as a result of last week’s provisional rescue by euro zone leaders and private-sector creditors. In fact, they go up. Athens’ borrowings will increase by 31 billion euros under the rescue scheme, according to an analysis by Reuters Breakingviews. This increase, equivalent to 14 percent of GDP, will push the country’s estimated peak debt/GDP ratio next year to 179 percent.

This bizarre result comes because of the way the different elements of the fearfully complex rescue plan interact. Greece will need to borrow extra funds to enhance the creditworthiness of the new bonds it will provide the private sector. It will also need to inject capital into its own banks. These extra borrowings amount to 55 billion euros and will more than outweigh the reduction in Greece’s debts that comes as a result of haircuts to be agreed by private-sector creditors and a planned buyback of debt at a discount to its face value.

The Breakingviews analysis is at variance with comments made by Nicolas Sarkozy, France’s president. He said after the July 21 summit of euro zone leaders that Greece’s debts would fall by 24 percentage points of GDP.  This was because he ignored the costs of “credit enhancement” and bank recapitalisation. He also included in the debt reduction 12 percentage points of GDP coming from the fact that Athens will be paying low interest rates on its official loans. While this will definitely improve the country’s debt sustainability, the benefit (under Sarkozy’s maths) will be spread over 10 years.

FINE PRINT

The euro zone leaders agreed to provide 109 billion euros in extra funds to Greece. This money will be supplied by the European Financial Stability Facility (EFSF), the euro zone’s bailout fund.

At the same time, private-sector creditors, under the auspices of the Institute of International Finance (IIF), plan to contribute a gross 54 billion euros to Greece’s funding needs by mid-2014 and a further 81 billion euros between mid-2014 and end-2020 –- or 135 billion in total. This contribution will come by swapping old bonds for new Greek bonds, or by rolling over old bonds into new bonds when they mature.

The IIF has proposed four “bond swap/rollover” options, two of which would require creditors to take an immediate 20 percent haircut on the value of their bonds. The other options don’t require haircuts but pay lower interest rates.

All this might seem extremely attractive for Greece if it wasn’t for the fine print of the IIF scheme. This requires Greece to provide collateral to partly guarantee the new loans, in a so-called “credit enhancement”. The mechanism for doing this isn’t the same for all the options. But, to guarantee the new 30-year bonds, Athens would purchase 30-year zero-coupon AAA-rated bonds. A zero-coupon bond is one that pays no interest. With such collateral, the creditors would be sure that they would at least get their money back at the end of the period — even if Greece couldn’t pay the interest on the loans.

Zero-coupon bonds are not as expensive to buy as normal bonds. But these 30 year instruments will still cost just over 30 percent of their face value. Greece will therefore need to find 42 billion euros to finance credit enhancements for the 135 billion euros of bonds covered in the IIF’s scheme, according to a paper presented to the euro zone leaders at their summit. Of this, 35 billion would need to be found before mid-2014. The EFSF will lend Greece that money and that is the main reason why Athens’ debts will rise rather than fall.

The remaining 7 billion euros of the 42 billion euros credit enhancement is expected to be required after mid-2014 because some of the debt that would be rolled over into new bonds wouldn’t come due until then. Greece is expected to find that cash itself.

In addition, Greece’s debts will increase because it will have to recapitalise its banks, which have large holdings of their own government’s bonds. The paper presented to the euro zone leaders earmarked 20 billion euros for this purpose. Greece will borrow this money from the EFSF too.

DEBT REDUCTIONS

Two parts of the programme will genuinely cut Greece’s debts. The first is the bond swap/rollover mentioned above. The IIF assumes that half of the creditors taking part will choose an option requiring a 20 percent haircut and the rest will go for no haircut. If 135 billion euros of old debt is restructured in this way, Athens’ debt will fall by 13.5 billion euros.

But not all of this will happen immediately — in the same way that not all the cost of credit enhancement will fall due immediately. If one assumes that the debt reduction works to the same timetable as the credit enhancement, this part of the programme would cut Greece’s borrowing by 11.25 billion euros by mid-2014.

The other part of the programme that would cut Athens’ debts is a planned bond buyback. The paper presented to leaders earmarked 20 billion euros for this purpose. It assumed that Greece would be able to buy back debt in the market at 61.4 percent of face value. That would be a premium of 9.54 cents to its market value. With these assumptions, Greece would be able to buy bonds with a face value of 32.6 billion euros. Although it would have to borrow the 20 billion euros from the EFSF, its debts would decline by 12.6 billion euros.

This buyback scheme has also been pushed by the IIF, which argues that a premium to market prices would be required to persuade bondholders to part with their paper. It also believes that this buyback is most likely to appeal to holders of very long-dated Greek bonds, which will not be involved in the “bond swap” and which trade at a particularly deep discount to their face value.

TOTTING IT ALL UP

To calculate the net effect of all this on Greece’s debt, it is necessary to add the 35 billion euro cost of the credit enhancement and the 20 billion euros for bank recapitalisation and then subtract the 11.25 billion benefit from the bond swap/rollover and the 12.6 billion reduction from the buyback. This sum comes to 31 billion euros.

The IMF had already earmarked 16 billion euros for bank recapitalisation in its review of Greece earlier this month. That means only 15 billion euros of Athens’ debt increase is unanticipated. The IMF also forecast that the country’s debt/GDP ratio would peak next year at 172 percent of GDP. To calculate a new debt/GDP ratio, therefore, it is only necessary to add the unanticipated extra debt. That is what is done in the Breakingviews analysis to produce a new figure of 179 percent.

It could be argued that this calculation ignores the fact that the 55 billion euros pumped into credit enhancement and bank recapitalisation haven’t vanished. They are assets that will continue to sit on the Greek state’s balance sheet. While that is true, the IMF’s convention is to look at gross debt. There’s a good reason for this. Money sunk into the banks as equity can’t be quickly redeployed to pay Athens’ debts. And what about the cash tied up in credit enhancement? That’s an asset that Greece won’t be able to touch for 30 years and won’t pay a cent of interest in the intervening period.

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

James Murdoch shouldn’t be kicked out of BSkyB. Some observers want to use the Murdoch clan’s troubles at News International, their UK newspapers company, to run them out of town completely. But BSkyB, the pay-television group, is a separate business. And Murdoch Jr has done a good job first as its chief executive and now as its chairman.

Admittedly, Murdoch Jr hasn’t covered himself in glory in handling the alleged phone hacking and police bribery scandal. As well as being chairman of BSkyB, he has indirect responsibility at News Corp for the UK newspaper arm. He was slow to grip the problems — not least by allowing Rebekah Brooks, who ran the papers and reported to him, to stay in her position for too long. There are now multiple probes into the saga which could embroil him further. But nothing has yet come out which should disqualify him from his BSkyB role.

It is also true that Murdoch Jr’s original appointment as BSkyB chief executive was nepotistic. But he then proved himself in the role. The business is now generating piles of cash –- in part because of the strategy he pursued. His track record isn’t perfect. But even the main cloud in his tenure -– his swoop on ITV –- had a silver lining. Although BSkyB wasn’t allowed to buy the TV group and lost a huge amount of money in the process, the raid did stymie a rival plan by Virgin Media to create a stronger anti-BSkyB front.

It might further be argued that BSkyB should have a chairman who isn’t also an employee of News Corp, which holds a 39 percent stake. But this needs to be weighed against the benefit in having that shareholder fully engaged in driving performance. What’s more, BSkyB’s eight independent directors, who constitute a majority of the board, have been robust in defending shareholders in the one case where there was a conflict of interest: News Corp’s attempt to acquire the remaining 61 percent. That bid has now been pulled. But there’s every reason to suppose that the independent directors would be equally robust if the furor over the hacking scandal dies down and the Murdochs return with a new bid.

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

Silvio Berlusconi really must go. It’s no longer about abuse of power and “bunga bunga” sex parties. His continuation as Italy’s prime minister could drive the country into a financial death spiral. His own supporters are shaken and the public is afraid. But the left-wing opposition is behaving responsibly, so there’s some hope.

Italy pulled back from the brink — slightly -– on July 12. After nudging above 6 percent, the yield on 10-year government bonds fell back to a still uncomfortable 5.6 percent. Part of the explanation is that the opposition agreed to a fast-track parliamentary vote on the government’s new austerity program. The multi-year fiscal squeeze of more than  40 billion euros should therefore be approved by the end of the week.

But this is not enough. Berlusconi is in virtual open warfare with Giulio Tremonti, his finance minister. Even though things have been patched up for now, the idea that this dysfunctional government could serve out its term until 2013 is troubling. Italy could lurch from mini-crisis to mini-crisis – with the borrowing cost on its debt, currently at 120 percent of GDP, ratcheting ever higher. The more Rome is perceived by financial markets to have fallen behind the curve, the bigger the fiscal adjustment will have to be to get it back on track.

Italy is too big to bail out. But it is a rich country — which can be bailed out by its people. That also means Italians have a lot at stake if the country goes down the tubes. In the past they have been far too complacent about their country’s political and economic mess. The mini-scare over the last few days is, therefore, salutary. It may help concentrate minds about the need to make some medium-sized sacrifices now -– such as front-loading the austerity program, much of which will only kick in from 2013 — in order to avoid bigger sacrifices in the future.

Now, there’s the small question of how to ease Berlusconi out of power. He’s extremely unlikely to fall on his sword. Indeed, he has continued to use the remaining vestiges of his influence to save his own skin rather than the country’s -– as witnessed by his recent attempt to pass legislation to delay the payment of a 750 million euros fine in connection with a 20-year-old scandal. So Berlusconi will have to be pushed out by members of his own right-wing coalition, which has a thin majority. There might just be a chance of this happening if market jitters continue.

Then, of course, there’s a question of whether Berlusconi would be replaced by anyone better. There are, broadly speaking, two options: a grand coalition led by a technocrat such as Mario Monti, the former European Commissioner; or early elections. The first might be a reasonable outcome, securing some short-term stability. But a technocratic government wouldn’t have a mandate to push through the long list of structural reforms and constitutional changes that are needed to kick-start growth in this sluggish economy. For that, new elections would be required.

Elections in the heat of the euro zone crisis would certainly be risky. The markets could get the real heebie-jeebies if the campaign turned demagogic. The current crisis could trigger a realignment of politics, and produce a new centrist coalition or even a catharsis of the system. But it could just as well lead to a stalemate, with no clear winner.

That said, Italy will have to confront its political problems at some point – and sooner is better than later. A little more fright now might be just what’s needed to shake the electorate out of its complacency.

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

The Greek crisis is fast descending into farce. The position of Germany, the euro zone’s main lender, is increasingly absurd. It is adamant that there will be no restructuring of Greek debt — at least, until 2013. And yet it is equally insistent that Athens’ private-sector creditors should contribute up to 30 billion euros to a new, 120 billion euro bailout. That would effectively amount to a half-cocked restructuring.

German Chancellor Angela Merkel’s inconsistencies seem based on her view that a sovereign restructuring won’t happen before 2013 just because she said it won’t. But her conflicting demands are becoming virtually impossible to reconcile. The ratings agencies are threatening to say that Greece has defaulted if there’s so much as a whiff of arm-twisting in the supposed “voluntary” rollover.

While the opinions of the agencies wouldn’t mean that Athens had actually defaulted — they are just opinions, after all — the European Central Bank is acting as if their thumbs-down would open the gates of hell. To show it really means business, the ECB is threatening in such a scenario to pull the plug on Greek banks, something which really would cause havoc. There’s clearly an element of bluffing on the part of the ECB — but it is becoming more transparent by the day, to the point of absurdity.

It’s not too late to end this charade. Athens is now funded until early next year, which buys a little time. Europe should use the summer months to restructure Greek debt properly and put in place measures to minimize contagion elsewhere.

A sensible Greek restructuring would probably involve slashing its debts by around half — provided it sticks with a medium-term program to cut its fiscal deficit, privatize assets and reform its corrupt public sector. Athens wouldn’t just get debt relief. It would also receive funding from the euro zone and the International Monetary Fund, albeit not as much as currently contemplated because private-sector creditors would be fully, and not partially bailed in.

To minimize contagion, two things would be needed. First, many European banks would have to be stuffed with much more capital than is likely to be contemplated under the stress tests that Europe is just about to publish. The key is to ensure that markets have confidence in banks even after they have taken a hit from a Greek default. Second, the ECB’s role as a lender of last resort to weak banks in weak countries would need to be reinforced.

All this would be costly. Governments would have to stand ready to inject equity into banks which the market was not willing to finance — in much the same way that the United States did when it conducted its stress tests of American banks in 2009.  Some banks would end up being partly nationalized. The euro zone collectively would have to provide cash to Athens to recapitalize its banks, which are up to their eyeballs in their own government’s debt. The European Financial Stability Facility, the region’s bailout fund, might even need to have its rules modified so it could provide a line of credit to Spain given that Madrid has been too slow to assemble a war chest to bail out its savings banks, which are awash with toxic property assets.

The euro zone would also have to provide an indemnity to the ECB to persuade it to act as lender of last resort to weak banks. This could be modeled on the way the UK guaranteed potential losses by the Bank of England when it provided a special liquidity scheme to British banks to help them finance their illiquid mortgage assets after the credit crunch.

But these costs would at least partly be paid for by the fact that the purely Greek bailout, if it happened as soon as possible, would be smaller. There would also be a huge benefit in getting an orderly default over and done with, rather than dragging out a process that is debilitating parts of the euro zone economy and has the potential to turn into a rout.

Such a program would require a lot of people to eat their words — not just Merkel but pretty much every other euro zone leader. Still, with market jitters now affecting Italy, which really is too big to bail, it is risky to prolong this opera buffa any longer.

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

Europe has only itself to blame for the mess created by the ratings agencies. Luminaries including Jose Manuel Barroso, the president of the European Commission, and Wolfgang Schaeuble, Germany’s finance minister, have lambasted Moody’s for downgrading Portugal. But Europe has wasted many chances to neuter the power of credit ratings agencies. Instead they choose to fetishize them. An especially stark instance can be seen in the European Central Bank’s current approach to Greece.

For years it has been apparent that the financial world pays far too much attention to the three big ratings agencies — Moody’s, Standard & Poor’s and Fitch. They should be treated like any other opinion in the market. But their special position allows them to create havoc. It is not just that investors hang on their every word, they are also embedded in the system for regulating banks and other official mechanisms. Yet the agencies are often too slow to spot trouble, with the result that borrowers are able to run up excessive debts. And when they do change their minds, they can help provoke a stampede.

One might have thought that policymakers would have got the message after the dot-com bubble burst in 2000 triggering a corporate debt crisis. But no. One might have thought they would have twigged after the credit crunch. But no. Sure, it’s hard to tell private investors to stop paying the agencies so much attention. But central banks and bank regulators could have cut them out of their thinking. Despite endless discussions and some half reforms, nobody in power embraced the radical option of treating the agencies just like any old analyst — and often a bad one.

The most glaring mistake has been the ECB’s decision to link the resolution of the Greek crisis — and, by extension, potentially the future of Europe — to what these agencies think. The ECB says it won’t accept Greek government debt as collateral if agencies take the view that Athens has defaulted. Such a threat, if carried out, could bankrupt the Greek banking system, which relies on such collateral to fund itself. As a consequence, it could cause chaos throughout the rest of the euro zone.

But the ECB shouldn’t rely on the agencies to tell it whether Greece has defaulted. One might have thought it was smart enough to form its own view. Given such an abdication of responsibility, it’s no wonder everybody else bows down before these false demigods. And then Europe is left complaining. It is an inconsistency, and a malaise, that beggars belief.