January 17, 2021



One way or another, a Greek debt writedown will happen

Whatever deal is, or possibly is not, cooked up for Greece, there is an important point to remember: the country’s debts, standing at €320bn (£235bn), or about 180% of GDP, are unsustainable. One way or another, a debt writedown will have to happen at some stage. Barring a miracle, it won’t be part of the current package.

This has been easy to forget as the euro circus has travelled between Athens, Berlin, Brussels and Riga in recent weeks and months. The talks have concentrated on setting the terms for the release of the last €7.2bn tranche of loans from the previous bailout.

Of course, the reforms demanded of Greece this time will also be pivotal in setting the framework for next bailout package, where €30bn-€50bn is thought to be needed. But even if agreement can be reached on the main items on the current agenda – budget surpluses, pension reform, privatisation programmes and so on – it will require extreme optimism to believe Greece’s finances are on a path to long-term stability.

In other words, financial markets’ definition of a cheery outcome this week – a deal that keeps Greece in the eurozone for now – would really represent another compromise. Debt relief is still the big issue. And the political obstacles, from Germany to Estonia to Spain, look greater than ever.

You might have assumed by now that senior bankers would have stopped grumbling about ringfencing rules, which oblige critical retail operations to be put into a standalone entity. The legislation was passed 2013 and the new structures must be put in place by 2019.

But, no, the complaints are getting louder. HSBC chairman Douglas Flint mentioned ringfencing within the bank’s threat to quit the UK. New Barclays chairman John McFarlane told the Sunday Times a couple of weeks ago that “there is a serious question as to whether these statutory and regulatory changes are really necessary”.

Now McFarlane’s predecessor at Barclays, Sir David Walker, previously a supporter of ringfencing, says he has changed his mind. The measure, he wrote in the Daily Telegraph, is redundant and costly. “It is hard to see how the complex structural re-engineering involved will further boost the resilience of banks beyond the new capital and leverage requirements that have been put in place elsewhere,” wrote Walker.

He says there was “incredulity” in other countries that the UK will continue with a policy that “would irrevocably damage its banking system”. This is starting to look like an organised campaign.

Do the bankers have a case? No. They’re missing the point as, thankfully, Martin Taylor, a member of the Bank of England’s financial policy committee, recently argued in a blunt speech full of good sense.

Taylor was a member of the Vickers commission that produced the original ringfencing proposals and thus is well-placed to explain what they are meant to achieve. The principal aim was not – as “so many people in the [banking] industry have either failed to understand or have chosen not to” – to make banks safer.

Instead, the first objective was to make it easier to wind down failed banks and save the critical parts worth saving – “exactly what could not be done in 2008 when RBS failed”, Taylor says.

The second aim was to isolate the retail part of banks’ balance sheets to stop taxpayers’ subsidising investment banking operations. That co-mingling had proved “very profitable for the bankers and very costly for the public”. Only the third aim, flowing indirectly from the other two, was to make banks safer.

Taylor sounded weary of countering the bankers’ bleats. It would be a good thing if chancellor George Osborne, in his Mansion House speech next week, reminded the industry that ringfencing will be a fact of life (it was re-affirmed in the Tory party manifesto) and is designed to ensure taxpayers do not have to pick up the tab in the next crisis.

The bankers may believe their capital cushions are now so plump that disaster cannot strike again. But, as Taylor also noted, bank bosses always think they have plenty of capital “until it is clear to everyone that it isn’t true”. Ringfencing, a modest structural reform, looks as desirable as ever.

Sophos, an Oxfordshire-based IT security firm, may be hamming it up by praising the UK’s new technology-friendly environment as a reason for preferring to float in London. In 2009, the group had considered the US before being snapped up by private equity firm Apax. But we should cheer the decision: maybe London is becoming more attractive for tech stocks.

Yet the rumoured £1bn-£1.5bn valuation looks toppy, even if IT security is a growth market. Sophos made top-line profits of $101m (£66m) last year. London’s fund managers should argue for the low end of that range.

The Guardian

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