The last eurozone crisis was solved – or deferred – when the president of the European Central Bank, Mario Draghi, declared in July 2012 that the institution was ready to do “whatever it takes” to save the euro. Bond markets calmed down, weak banks got access to funding again and an economic recovery of sorts materialised. In terms of central bank rescue acts, it was a textbook operation. Unfortunately, there are no easy ECB fixes for the new Italian crisis.
The ECB’s first problem is its own powers. Even if it were minded to try to reverse the dramatic sell-off in Italian bonds, the rules say it is only supposed to respond to emergency calls from countries that have agreed to budget conditions. With new elections now likely in Italy in the autumn, it’s hard to see how a deal could be done.
Even if a technical fudge could be found, the second problem is that the eurozone’s big powers might prefer the ECB to do nothing. Günther Oettinger, the EU’s budget commissioner, seems to believe a bout of market turmoil “might become a signal to [Italian] voters after all to not vote for populists on the right and left”. In practice, the experience might provoke a bigger vote for anti-euro parties, but the strategy seems set.
The third problem for the ECB will come if capital drains from Italian banks. In that case the ECB could in theory claim a clear need to intervene to prevent damage to eurozone banks outside Italy. But, again, there could be pressure to stay on the sidelines. Under the Target2 system, which is the way eurozone central banks keep account of liabilities to each other, Italy already owes £442bn. Any ECB-backed support for its banks would see that figure rise further, provoking fears over repayment. Note that Target2 imbalances are already a hot topic in Germany, where the Bundesbank is the single biggest creditor.
“The weakening in chancellor Angela Merkel’s position, and the rise of the far-right AfD party, might prompt Germany to take a tougher stance than it did with the eurozone periphery in the past,” says thinktank Capital Economics.
All those factors, one suspects, lay behind the warning from Ignazio Visco, governor of the Bank of Italy, that the country is “a few short steps away from the very serious risk of losing the irreplaceable asset of trust”. In his position, he’s paid to sound alarmed – but he is also basically correct.
Dixons Carphone baffles its investors
Incoming chief executives often assume they have a prerogative to rubbish their predecessors’ record and to talk up the size of the task ahead. Few, though, make such full use as Alex Baldock, fresh out of Shop Direct and eight weeks into the top job at Dixons Carphone. His criticisms, delivered alongside a thumping profits warning, were extraordinary.
Dixons Carphone is “nowhere near” making the most of its strengths and “nobody is happy with our performance today”. While he has promoted “top talent” and cleared out “unnecessary layers and silos”, some £30m has to be spent immediately on improving the “colleague and customer proposition”, which turns out to mean basic stuff like getting the store staff to answer the phone. And, by the way, Honeybee, the now-sold software experiment, and a venture with Sprint in the US were unhelpful distractions.
Shareholders will be baffled. A board chaired by Lord Livingston, who has been a director since 2015, never previously sounded worried about under-investment or flashy adventures. Indeed Baldock’s predecessor, Sebastian James, before he hopped off to Boots, reckoned rough trading conditions were mostly to blame when he produced his own profits warning last August. Now, about five minutes after James departed to cheers for his “outstanding contribution”, there is a sea of self-inflicted troubles.
Livingston, assuming he shares Baldock’s diagnosis, owes investors an explanation. Profits this year will be £300m-ish, about £80m short of what the City expected and miles away from the £501m achieved a couple of years ago. Could such a sharp fall have been avoided if action had been taken earlier? That would seem to be what Baldock is suggesting.
At least the new man thinks all the woes are “fixable”. Yet his grumble about the need for Carphone to find a new business model sounded familiar. In short, Carphone needs to renegotiate its contracts with network operators now that fewer consumers want two-year mobile handset deals. On that front, Baldock was only able to say the group is “making progress”. Perhaps best to tone down the fighting talk until you’ve got something to show for it. In the circumstances, the 21% fall in the share price looks about right.
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