When the economic situation is bad (the
country’s GDP estimates fell again on Wednesday) there’s
nothing like a dose of political mismanagement to give things a good hard
shove towards the same abyss that Athens disappeared into sometime in the
middle of last year.
It’s only September but the scenes from Madrid in recent days prompted me to revisit the annual predictions in which we indulge every January. At the start of the year, as we looked forward to another 12 months of experimental eurozone economics, not to mention politics, with renewed austerity measures and another euro treaty, this column said: “None of this has been tested at the ballot box and I predict a year of popular political protest across the eurozone, some of which will turn violent, prompting shocking scenes as governments use force to regain order.”
You can’t let a gun off slowly, but Spanish prime minister Mariano Rajoy has been openly flirting with the idea of seeking a bail-out from the European Central Bank in recent days but only if capital market investors forced Spain into it by sending yields on Spanish government debt higher.
In the land of bull fighting, he has waved the proverbial red rag. Lo and behold, Spanish bond yields duly shot up again on Wednesday to 6pc, pricing Spain out of the markets and forcing him closer to going cap in hand to Frankfurt, assuming the ECB bail-out is actually real as opposed to an empty promise. This, in turn, will undermine his political credibility at home which the riots in Madrid and secession fever in Catalonia reveal is already suffering.
It reminds me of John Major’s government in 1992 and a determined Norman Lamont giving George Soros any excuse to bet against the pound and test just how determined the Treasury really was about defending sterling.
The point about Mario Draghi’s ECB bail-out offer was to act as a back stop, an insurance policy to calm markets and reassure them into funding the Spanish state again.
Once the prime minister himself starts openly talking about using the bail-out backstop the equation changes as far as investors are concerned.
Any hint of a bail-out would normally send investors rushing for the exit. Playing chicken with the market first is simply asking for trouble.
The odds on Spain becoming the latest southern European country to appoint a technocratic government to try to manage the country out of its chaos have shortened dramatically.
And things are about to get worse for Spain and its prime minister with a triple witching hour on Friday. The results of a Spanish banking sector audit are published alongside Rajoy’s new Budget and reform programme plus the threat of a downgrade to junk status for its sovereign debt.
As Mike Ingram of BGC Partners pointed out on Wednesday, eurozone leaders should take heed, and quickly, of one of the United States’ founding fathers, Benjamin Franklin, who said: “We must, indeed, all hang together, or assuredly we shall all hang separately.”
RBS must not face the same fate as Barclays
More trouble for banks, and specifically RBS.
A wrongful dismissal case against RBS being heard in Singapore reveals that familiar voice of a mocking, arrogant trader who thinks he, and his organisation, are above the normal standards of decent behaviour expected of banks by society.
After Barclays put its hand up over Libor-rigging earlier in the summer, and was duly fined £290m with the chairman, chief executive and chief operating officer being forced out, other banks were bound to follow. The investigation is still going on into Libor-fixing at RBS but this employment tribunal gives a sneak preview of the evidence that the regulators will be sifting through.
“Our six-month fixing moved the entire fixing, hahahaha,” laughed the trader concerned in one recorded exchange.
But whatever happens to the investigation into RBS, the outcome should differ from that meted out to Barclays.
Stephen Hester, RBS chief executive, has already warned any settlement over Libor-rigging could be expensive. But it should not involve another witch-hunt by the Bank of England and Financial Services Authority to remove current management.
Hester came into RBS late in 2008 to rescue it on behalf of taxpayers who had been forced to bail out the lender after those self same regulators, not to mention the Treasury, had allowed it to balloon out of control.
While any US regulatory action against RBS might involve a fine, it would be wrong for the FSA to levy a financial penalty on RBS for Libor-rigging as it will be taxpayers footing the bill - again.
Instead, the FSA, and any other relevant agency, should take the opportunity to review the actions of individuals who were running the bank at the time. This has got to include the untouchable Fred Goodwin. While Hester has been denied by politicians pay contractually owed to him for doing the rescue job agreed with politicians, Goodwin continues to drain every possible penny he can from the RBS coffers in the form of his egregious, but no doubt contractually agreed, pension.
Osborne should be wary of the golden rules
Golden rules of fiscal policy have generally proved anything but. Gordon Brown became the master at shifting targets so as to hide his failures. George Osborne is facing the same problem over his ambitious and poorly drafted rule of having national debt falling as a percentage of GDP by 2015-16.
It was designed to put our fiscal credibility “beyond doubt”. But fiscal credibility these days is a relative concept and we’re doing OK versus most, so he may as well change it sooner rather than later and certainly as far ahead of the next election as possible.