peterbirks: (Default)
peterbirks ([personal profile] peterbirks) wrote2010-01-13 09:14 am

State of Play

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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Money and Politics

[identity profile] geoffchall.livejournal.com 2010-01-13 09:36 am (UTC)(link)
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.
nwhyte: (eu)

[personal profile] nwhyte 2010-01-13 09:37 am (UTC)(link)
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.

(Anonymous) 2010-01-13 01:27 pm (UTC)(link)
Since when was the EU a democracy?