Financial crisis

By Gideon Rachman
Travelling between Madrid and Barcelona on a recent weekday afternoon, I wandered into the first-class section of the train. There was only one passenger, snoozing on the black leather seats – and he turned out to be the conductor, who looked up startled at the sound of an intruder.

Gideon Rachman

In the week of Margaret Thatcher’s funeral – and with the euro-crisis bubbling along – it is interesting to take a look back at what Thatcher had to say about the single currency. Much of the commentary since her death has portrayed Thatcher’s views on Europe as irrational and backward-looking. For example, Anne-Marie Slaughter in the FT, wrote that “her attitude to Europe was a throwback to the 19th century”. For good measure, Prof Slaughter adds that Thatcher’s views were “deeply anachronistic and dangerous”. Of course, there was a strong element of emotion in Thatcher’s views of Europe. So what? It is more interesting to note that she also made some quite precise criticisms of the European single currency that look increasingly prescient, as time wears on. Read more >>

Portugal’s painful austerity programme runs into trouble
Pedro Passos Coelho, Portugal’s prime minister, is one of Europe’s staunchest backers of austerity. But his government’s painful two-year programme of structural adjustment has yet to deliver the results promised. And late last week, the country’s constitutional court issued a ruling that could fatally undermine his efforts to get the economy back on track.

Gideon Rachman

The refusal of the Portuguese courts to authorise the full version of the latest round of austerity cuts will be watched closely in neighbouring Spain – which is, of course, a bigger and more systemically important economy. The Spanish fear that, economically and politically, Portugal offers a vision of their future. The recession there is deeper and so are the cuts to government spending. But with Spain facing another year of recession and cuts – the Spanish too are wondering how long their public will tolerate austerity. Read more >>

By Gideon Rachman

In the end, the Cypriots swallowed the bitter medicine. Facing national humiliation and a bleak future many complain their small nation has been forced to succumb to the will of a larger, merciless power – Germany.

What lies ahead for Cyprus and the eurozone?
After a failed bailout plan that involved taxing the deposits of small savers, Cyprus is now the epicentre of the eurozone crisis. Lawmakers are now seeking an alternative before Monday, when the European Central Bank will cut emergency liquidity to Cyprus’s foundering banks. Kerin Hope, Greece and Cyprus correspondent; Peter Spiegel, Brussels bureau chief; and Patrick Jenkins, banking editor, join Ben Hall to discuss what’s happened and what lies ahead.

By Gideon Rachman
European leaders must surely know that they are taking a big risk with Cyprus. The danger is obvious. Now that everybody with money in Cypriot banks is being forced to take a hit, nervous depositors elsewhere in Europe might notice that a dangerous precedent has been set. Rather than run even a small risk of an unwanted financial “haircut” in the future, the customers of Greek, Spanish, Portuguese or Italian banks might choose to get their money out now. If that starts to happen, the euro crisis will be back on again – with a vengeance.

By Gideon Rachman

Some months ago, I was discussing the euro crisis with a high-ranking US diplomat. “It’s back to the 1930s, isn’t it?” said my companion with a mixture of gloom and relish. “The extremists are on the rise.”

Politicians the world over have huffed and puffed about excessive pay at banks since 2008. While remuneration curbs were put in place, nothing fundamentally challenged bank operations, or their ultimate flexibility to reward staff. The European Parliament has bucked that trend with the mother of all bonus clampdowns. Here are five key questions on the cap: how it works, how you can avoid it, whether it will really pass and what it means for Britain and the City.

1. How is the cap calculated and applied?

The bonus text runs to just half a side of A4. The core measure is a mandatory 1:1 ratio on fixed/variable pay is applied to all EU banks and subsidiaries around the world, as well as non-EU banks operating in Europe. This ratio can rise to 2:1 with a 66 per cent shareholder vote, with a quorum of more than 50 per cent. If turnout is lower, the majority must be 75 per cent. Up to a quarter of the variable pay can be paid in long term instruments (deferred for more than five years), which track the health of a bank and can be clawed back. The value is discounted at a rate set by the European Banking Authority, which must take account of inflation and risk. Some details still need to be fleshed out. But MEPs predicted that even with the discount the maximum ratio would be closer to 2:1 than 3:1.

2. Are there any loopholes?

There are always loopholes. The question is whether it would make a material difference and allow banks to operate relatively unscathed. The obvious one is just raising fixed pay, but it has obvious shortcomings. The incentives for long term pay within the cap will likely be aggressively used. But even with the most banker-friendly discount rate calculation the ratio will not move much above 3:1. Other points of vulnerability could be the definition of fixed pay: could some of that effectively be a bonus? How the rules apply outside the EU and to non-EU institutions will also be important in determining whether bankers can be shuffled around the world to avoid the restrictions. Finally there is talk of some banks taking legal action against the provisions, but there will surely be a public relations downside to that.

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By Gideon Rachman

A rare beast has reappeared in Europe. In recent years, there were no confirmed sightings. But in the past few weeks, this shy animal – known as “good news” – has been spotted in various European locations.