peterbirks | 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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