State of Play

[peterbirks]

Well, it's official; the Birks theory, first expounded when quantitative easing/fiscal stimuli started spreading in late 2008, of multinationals becoming safer repositories of money than states, has come to pass.

The FT reports this morning that the combined risk of default of the 15 developed European nations (i.e., including France, Germany and the UK, but excluding the developing east European basket cases) is higher than for Europe's top 125 investment-grade companies. In hard numbers, it will cost you $63,000 a year to insure $10m of debt with a basket of the top 125 companies, and $71,500 to do the same for the 15 developed EU nations.

And don't even think about Greece. It will cost you $263,000 to insure against Greece defaulting (i.e., a more than 10% chance of the country not paying on its bonds at any time in the next five years), while you could insure against BP defaulting for less than $50,000.

In other words, countries are no longer the safe haven for investors that they once were. Rather than buy bonds or gilts, a less risky strategy would be to buy investment-grade corporate debt.

Now, an idle question here is, have the fund managers caught up with this? When they are investing your pension money in "the safest" asset classes (perhaps because you are heading towards your retirement at a worryingly fast pace), are they still putting the money into government bonds rather than investment-grade private companies? My hunch would be that they are, and that's worrying.

A second idle question sprung into my mind while I was reading about Greece. We've long known that a standard strategy amongst some EU countries is to vote in favour of regulations in Brussels, which the UK promptly obeys (despite voting against) and the countries that voted in favour (say, Portugal), promptly ignore. Greece has taken this to new heights by supplying the EU with incorrect numbers in the first place. Its 2009 deficit was probably nearer 18% than its estimated 12%. So any promises to get back to a "required" deficit of 3% by 2012 are pure pie-in-the-sky. Apparently Greece's numbers have been utterly unreliable for more than a decade.

So, what will be done? Well, either Greece's austerity measures will fail, or the government will fail, which was what prompted my idle thought -- what's the planned procedure if an EU member ceases to be a democracy? Would the EU parliament have a new division for the colonels to sit in?

More likely, I guess, would be that the colonels (or whoever was really in charge) would maintain a facade of democracy, a fudge that would allow the EU to save face. And the chances of that happening somewhere in the EU within five years? Higher, I reckon, than the chances of Greece defaulting on its debt.

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Comments

Money and Politics

[geoffchall.livejournal.com]

I don't have the riskable money to do it (or the know-how), but I'd be quite happy to insure Greece against defaulting, because it's politically unfeasible. When it comes to it the rest of the Eurozone will fudge together something that will be called restructuring and special measures. The French will broker it, we'll sit on our hands and say 'a pox on your Euro' and the Germans and Benelux will pay for it. I understand that the margin between the rate at which ones country is borrowing and the rate at which Germany is borrowing is some kind of measure of country-stability. From memory Greece was coming in at something approaching 3% over 'German base'.

What will be interesting is the political price to be exacted from the Greeks, which I wouldn't mind betting includes some arm-twisting over the Northern Cyprus/Turkish/EU situation.

Re: Money and Politics

[nwhyte]

Re your last point - that would require some joined-up thinking from the EU!

And anyway the new Greek govt is on the right wavelength for the Cyprus situation. Less so with regard to Macedonia....

Re: Money and Politics

[peterbirks.livejournal.com]

Did you know that the Cyprus flag is the only flag in the world which features a map of its own country?

Irrelevant factoid of the day now over.

PJ

Re: Money and Politics

[nwhyte]

No longer the case - Kosovo has followed suit.

(Though this does not sufficiently impress the Greek Cypriots, who refuse to recognise Kosovo.)

Re: Money and Politics

[real-aardvark.livejournal.com]

I'll take you up on that bet, Geoff.

The Germans have been backing an insolvent Greece up for quite a while, now. Hell, even letting them in to the EU on that silly 3% rule was absurd in the first place. (Incidentally, the Germans pulled the same trick with the Irish in the early 1990s. I've no real clue why. Something for future historians to ponder.)

There's a decent sized amount of wonga floating around in internal EU finance to keep Greece on its feet for a few years yet; indeed, enough to create a "moral hazard." Feel free to be a bunch of work-shy vicious xenophobic street-fighting retards ...

... so long as you're not that keen on the Turks. Echt Deutsch, aber auch Hellenisch.

I'll take practically any bet you care to make on Turkey/Northern Cyprus.

Re: Money and Politics

[peterbirks.livejournal.com]

You're not wise on this if you take him up, geoff. He doesn't pay.

PJ

Re: Money and Politics

[real-aardvark.livejournal.com]

I have yet to be informed where to send the (I believe) twenty quid I owe you, O small pallid godlet. I toyed with the idea of going to see Richard Herring just so's I could find you in the audience, but even that would have been a waste of time.

I would suggest sending the money in Euros, post-restante, to a convenient hotel of your choice in Nice, some time around March...

Re: Money and Politics

[peterbirks.livejournal.com]

Only a tenner, Mr Doubleday, only a tenner. Will detail contact land later. Although post seems a bit strange round here at the moment. A number of financial things which should have arrived early in the new year are not yet here.

[nwhyte]

Article 7 of the Treaty is clear that EU member states can have their voting rights suspended if they cease to be democratic:

1. On a reasoned proposal by one third of the Member States, by the European Parliament or by the European Commission, the Council, acting by a majority of four fifths of its members after obtaining the consent of the European Parliament, may determine that there is a clear risk of a serious breach by a Member State of the values referred to in Article 2. Before making such a determination, the Council shall hear the Member State in question and may address recommendations to it, acting in accordance with the same procedure.

The Council shall regularly verify that the grounds on which such a determination was made continue to apply.

2. The European Council, acting by unanimity on a proposal by one third of the Member States or by the Commission and after obtaining the consent of the European Parliament, may determine the existence of a serious and persistent breach by a Member State of the values referred to in Article 2, after inviting the Member State in question to submit its observations.

3. Where a determination under paragraph 2 has been made, the Council, acting by a qualified majority, may decide to suspend certain of the rights deriving from the application of the Treaties to the Member State in question, including the voting rights of the representative of the government of that Member State in the Council. In doing so, the Council shall take into account the possible consequences of such a suspension on the rights and obligations of natural and legal persons.

The obligations of the Member State in question under this Treaty shall in any case continue to be binding on that State.

4. The Council, acting by a qualified majority, may decide subsequently to vary or revoke measures taken under paragraph 3 in response to changes in the situation which led to their being imposed.

5. The voting arrangements applying to the European Parliament, the European Council and the Council for the purposes of this Article are laid down in Article 354 of the Treaty on the Functioning of the European Union.

You don't get expelled, though - you have to keep applying EU law even though you didn't get to vote on it (rather like Norway does today).

In practice you are probably right that, especially if it is a case of a "soft coup", nothing much would happen. There are a couple of precedents from the way the Council of Europe dealt with Turkey and Greece; but basically the practice of international organisations is to keep up the dialogue in the hope that reason will prevail, so that in the end the non-democratic state's representatives tended to jump before they were pushed. The only counter example, the EU's attempts to impose sanctions on Austria after Haider got into government, ended with egg on face all round.

[nwhyte]

The EU can't expel mambers, but they can withdraw under Article 50:

1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.

2. A Member State which decides to withdraw shall notify the European Council of its intention. In the light of the guidelines provided by the European Council, the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal, taking account of the framework for its future relationship with the Union. That agreement shall be negotiated in accordance with Article 218(3) of the Treaty on the Functioning of the European Union. It shall be concluded on behalf of the Union by the Council, acting by a qualified majority, after obtaining the consent of the European Parliament.

3. The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period.

4. For the purposes of paragraphs 2 and 3, the member of the European Council or of the Council representing the withdrawing Member State shall not participate in the discussions of the European Council or Council or in decisions concerning it.

A qualified majority shall be defined in accordance with Article 238(3)(b) of the Treaty on the Functioning of the European Union.

5. If a State which has withdrawn from the Union asks to rejoin, its request shall be subject to the procedure referred to in Article 49.

How many divisions, etc?

[real-aardvark.livejournal.com]

That's all legal bullshit, Nicholas, and you know it.

On the simple side, any EU state that wishes to exit the EU would simply have to pass a domestic law, or diktat, or Order in Council (no prizes for guessing that particular state). Et voila! Article 50 is a piece of piss. Nobody will do it, because the downside is huge compared to the upside.

On the complex side, it's just about possible to imagine the EU expelling a member. I'm sure they'll dredge up some sort of harmonisation bullshit to do with not breaching 3% fiscal limitations here or there; not sending gypsies to ghettoes; not acting as a conduit for people or heroin smuggling; that sort of thing. These might all be valid and worthy reasons. But the legal underpinnings would still be artificial bullshit.

In practice, the failing states most likely to be expelled/demand out are so tiny and insignificant -- Bulgaria, Slovakia, and frankly Ireland spring to mind -- that the Germans will just twist a few financial arms, print some paper that isn't really paper, honest, and buy their silence.

As Mae West almost said, "legality has nothing to do with it."

[(Anonymous)]

Since when was the EU a democracy?

[(Anonymous)]

Ah the nostalgia. This could be a "Greatest Hits" lettercol in the 1980's!

Brian