Today GE issued a profit warning and cut its dividend to share holders from 12 cents to 1 cent. It is only the third time since the Great Depression that GE has reduced its dividend in this way. It told its share holders it would be taking a $22 Billion charge because one of its units, its power unit, is in deep trouble. GE has about $116 billion in debt.

In 2007 the banks had flooded the global market with sub-prime loans. The banks were also holding many of those same loans themselves or had transferred them to Special Purpose Vehicles (SPVs) they had set up, staffed and lent money to.

Today it is not the banking world which stands at the centre of the storm but the corporate world. In the last years they have flooded the market with junk rated bonds. At the same time they are also burdened with high yielding, leveraged and covenant- lite loans. Taken together they are about $2.4 Trillion of debt.

2007 sub prime loans. 2018 corporate junk bonds and leveraged loans. 2007 banks and SPVs funded by the banks. 2018?

Where is this sub-prime corporate debt sitting today?

Nearly half sits in Insurance Companies and Pension funds.

Given the close ties between insurance and pensions this is not a happy picture.

Along side the pension and insurance industry who are sitting on a mountain of high risk/high return junk there is the liquidity trigger of bond backed, fixed income and high yield ETF’s. They are admittedly still small compared to the still larger mutual funds but they are a choke and panic point. The ETF market is broad in its consumer appeal but very narrow where it counts – in who makes and provides the heavy lifting for the market. There are about 5 main companies who ‘Sponsor’, which means run and control ETF’s globally. They are BlackRock, Vanguard, State Street, Invesco and Charles Schwab.  According to Forbes in 2017,

Five Largest ETF Providers Manage Almost 90% Of The $3 Trillion U.S. ETF Industry

Of those 5,

…the top 3 ETF providers dominate the market with a combined market share of 82% …  the top-three players also account for more than 70% of all ETF assets globally.

The sponsors in turn rely for the heavy financial lifting – to buy and sell the assets that go into an ETF – on what are called the Authorised Participants. Who are they? The main ones are … the big banks like Merrill Lynch, Fortis bank, Morgan Stanley, HSBC, Barclays, Citi etc. Some companies are both sponsor and authorised participant.

And some of those banks are also the people who have extended the leveraged loans and revolving credit lines to GE and others. Something its banks may come to regret. Because as of today GE is now shut out of what is called the Commercial paper market which is essentially very short duration bonds. This means GE is now reliant for much of the cash flow it needs for day to day operations upon revolving credit from its banks.  The same banks who also buy GE bonds to put into their ETFs.

What could possibly go wrong?

Well… the Fed is trying to ‘normalise its balance sheet by withdrawing some of its liquidity. It is also trying to let interest rates rise. Taken together this is the Fed trying to bring to a much postponed end, the temporary and extraordinary measures brought in to deal with the little 2008 sub prime blip.  The ECB is also planning to end in December its vast 2.4 trillion euro bond buying stimulus package of the last three years.  Though it has said it will not raise interest rates till late next year. While over in China the central bank has, as far as I can see, lost control and is now more reactive than proactive.  It has again and again tried tho reduce official lending and hold back the flood of shadow bank lending that fuels the property speculation market that is the centre of all regional ‘development’ and social stability in China.

Corporates are floundering in a river of debt of their own creation. They are the ones who have taken on loans they will not be able to pay if interest rates increase even a little. The banks have packaged up and sold on that leveraged loan debt and those junk bonds and they have been gobbled up by pensions and insurance companies desperate for yield after a decade of ‘temporary’ low interest rates.

In place of zombie banks we now have zombie corporations kept alive by low interest rates and bond buying QE. Those low interest rates have created a dysfunctional market. Zombie corporations are kept alive because they can sell their sub-prime bonds and get sub prime loans in a market where the buyers of those bonds and securitised loans, the insurers and pension funds and fund managers, are so desperate for yield that they gobble up ‘high yield’ which is just a euphemism for sub prime.

This time it will not be the banks that trigger another financial collapse. Not HSBC or Countrywide this time but GE or Caterpillar. The companies who have been propping up their share prices with endless buy backs funded by… low interest rate loans and junk bond issues. Or perhaps it will be the corporates who are merging and acquiring.

Last time the top of the market was marked by and to some extent triggered by a wave of vast and disastrous bank mergers. HSBC was early when in 2003 it bought one of the largest subprime lenders in america, Household International for $15 billion. Bank of America bought Merrill Lynch. RBS bought ABM Amro. Hypo bought Depfa.  Every one of them saddled the purchaser with unmanageable debt and most ended in massive bail outs.

Today it is the turn of the corporates. 2016 – Bayer bought Monsanto. Funded with $15 billion in bond sales. 2017 – CVS, a retail pharmacy and health care company bought Aetna which is a health insurer for $70 billion 40 billion of which was funded by a bond issue. 2018 – American health provider and insurer, Cigna bought Express Scripts. Funded by a $20 billion bond issue.  2015 – AT&T bought DirectTV. Funded by debt. 2018 – AT&T bought Time Warner. Funded by debt. AT&T’s total debt is now around $180 billion which is a larger debt than many countries. Just yesterday IBM bought RedHat for $34 billion of which about $20 billion will be backed by new debt.

Buy backs supporting share prices, while huge acquisitions attempt to capture market share or buy growth that the parent can’t generate themselves and all funded by debt.

Of course you could say that issuing bonds insulates the corporates because the interest on those bonds is fixed. Quite so. The question I would ask is who bought those bonds and what with? Was it debt?

In Part One I suggested that not only are the 1% well aware of this but that while they have been telling us how we must ‘save’ the present system and assuring us that any radical break with the policies of the past will result in catastrophe, they have in fact been working hard to engineer very radical changes.  We have all seen the decline in living standards and are all acutely aware of the changes which directly effect us. But I wonder if  the true significance of the changes, when taken together, has largely gone unnoticed? Certainly the Over Class has not made clear their real intentions. Why would they?  I believe the 1% know that to protect their wealth and power next time will require radical political dismantling of what is left of our democracy.  Necessarily much of what follows is speculative. But the speculation is, I think, rooted in and extrapolated from what we can already see happening today.

Some things about the present system must be maintained, others expanded and some new ones added. Taken together the changes, I think, amount to the beginnings of a Manifesto for the 1%. So here are some of the things, I think, our global Over Class would like to achieve and how they intend to achieve them.

As I have been writing this article it has grown, each section getting longer. I’m afraid I sometimes find it difficult to know where the sweet point is between, on the one hand – being too dense, and on the other – over explaining. So here is a outline of the sections so that you can see where I’m going and skip the sections that seem obvious.

Outline.

1) The Over Class must retain and consolidate their control over the global system of debt.

2) The power to regulate must be taken from nations and effectively controlled by corporations.

3) Professionalize governance. Democracy can be and must be neutered, and an effective way of doing this is to insist that amateur, elected officials MUST take the advice of professional (read corporate) advisors. Expand current law to enforce this.

4) The financial system badly needs un-encumbered ‘assets’ to feed the debt issuing system. A new way must be found to prise sovereign assets from public ownership. Such a new way is suggested.

5) In order to facilitate the political changes necessary, the public mind-set must be changed. National Treasures such as the NHS in Britain must be re-branded as evil State Monopolies.

6) Effective ways must be found to convince people that democratic rule is no longer sufficient to protect them.

7) An alternative to Democracy must be introduced and praised. That alternative must be the Rule of International Law as written and controlled by the lawyers of the 1%. People must be told that this is all that stands between them and an increasingly hostile and anarchic world. But that it can only keep them safe if it has absolute authority over democracy. People must voluntarily bow to it out of fear and its decisions must be as absolute and unquestionable.

In conclusion, I suggest that this amounts to a dystopian version of the old environmentalist idea of Spaceship Earth. A corporate version where we are just passengers who must pay our passage in a ship someone else owns. No longer inhabitants or citizens with the same inalienable right to be there and be heard as anyone else. 

And yet, dark as all this may seem, victory for the 1% depends on no one understanding what is happening. If we are already beginning to see the outlines of what the Over Class wants, then their victory is not assured. If our ignorance is their bliss, then our understanding is like sunlight on a vampire’s skin.

All is not lost, not by a bloody long way.

Towards a Manifesto for the supremacy of the 1%

1) Control of debt.

The 1%, through their ownership of the private banking system, must continue to issue and handle the majority of debt and have legal control over the payment of those debts. Power over the system of debt is critical to the 1% and one thing is paramount – there must be no democratic, nor public, control of it. That old saying, “give me control over a nation’s currency…” should now read, give me control over a nation’s debt. Debt trumps currency. Which in turn means the 1% must maintain custodial power over the money used to pay those debts.

At the moment, the largest custodial banks are those on Wall Street. Which means any dispute over what happens to that money gets settled in the Southern District Court of Manhattan. And that court has consistently interpreted international law in ways that have elevated the rights of private banks and bond holders over the rights of nations and entire peoples.  Two recent decisions in the US Supreme Court, which upheld the Southern District rulings regarding the Vulture funds Elliott Associates, NML Capital and others, forced the Wall Street custodial banks holding Argentina’s money, not only to freeze all payments but also to reveal all confidential information regarding Argentina’s assets. It is no exaggeration to say that these rulings favoured the Vulture Capitalists so decisively that it has changed the balance of power between private bond holders and entire peoples, in favour of the former. Even the UN wrote that the rulings were so sweeping that they,

…set legal precedents which could have profound consequences for the international financial system…

and which,

… will erode sovereign immunity.

Such is the power that the present arrangements give to the global 1% and their banks, that no group of emerging nations must be allowed to create rival custodial banks under a different court. Such would not only rival the mighty custodians of Wall Street but would stop the trend of enforcing US corporate law as de facto global law. If ever sovereign nations did not fund themselves by issuing debt, and if ever the 1% did not control where that debt and the ‘money’ to pay it was stored, and if ever the true sovereignty of nations was re-asserted against Vulture capitalism, then a great deal of the 1%’s power would evaporate. So none of that can be allowed to happen.

It is perhaps THE most important point of any for-profit, debt-based, currency or system (debt doesn’t HAVE to involve interest) that that debt must increase.  Not because it is a law of physics nor even that it benefits the 99% (largely it doesn’t) – it happens because it benefits the 1% to whom the interest is owed and more fundamentally because the entire value of the 1%’s debt-based, paper wealth depends upon there being a constant increase in debt. If debt didn’t increase then their wealth would become, first unstable, and then burn to ash. If that seems like I plucked this claim out of thin air I suggest that our present crisis and many others before it are the abundant proof. When the expansion of the global bubble of debt began to slow in 2007 it made the value of all the existing debt-based wealth first uncertain and then implode. Everything done since has been for the sole purpose of reflating the bubble of debt so that debt-based wealth could be said to have value. The 1% will never give up the power they currently enjoy to issue and control the inflation of debt, because their wealth would evaporate if they did.

2) Regulatory power.

One of the areas of power remaining to nations which act as an unwelcome hindrance to global corporate power is the power to regulate. This must be curbed and proposals are already on the table to do so. Such an effort is now enshrined in the multilateral trade agreements currently being agreed behind closed doors: the TPP, TTIP and the one which will remove finance from national control, TISA. These agreements all contain a new approach to regulation which we could summarize as “Our experts, Our data, Our regulations.” In a paper submited to the TTIP negotiations jointly by the US Chamber of Commerce and Businesseurope we find a proposal to adopt what they call “Regulatory Cooperation”. Which the paper says will,

“…put stakeholders [the corporations]  at the table with regulators to essentially co-write regulation.”  P. 4

The new philosophy, despite its coy claim to being about ‘cooperation’, puts corporations firmly in charge of setting the regulations for themselves and their products on the grounds that only they have the necessary experts, who have the necessary access to the data which is otherwise “confidential”. Or, to appropriate a phrase from the American revolution and use it for demanding more rights for corporations, “No Regulation without Consultation.”

The policy already being written in to the Trade Agreements and given specific teeth by their Investor State Dispute Settlement (ISDS) clauses, is not simply about who regulates what, it is the leading edge of a broad concern to remove any important decisions from democratic control.  The ISDS, in case you are not familiar with the jargon, is the clause first used in Bilateral Trade Agreements, now being incorporated into all Trade agreements, which gives corporations the right to take nations  to privately run arbitration at which they can sue the nations … and almost always win. And this, for me, is the key point. Disastrous as the Trade Agreements will be in and of themselves, they are a leading edge of this much more profound attack (see below) which I think we will see gathering pace in the next few years.

3) Neuter Democracy by Professionalizing Governance.

The Global   do not like democracy. In their less guarded comments this is beginning to show. Here is the EU Trade Commissioner, Karel De Gucht, quoted in a piece over at The Automatic Earth talking about the Scottish independence vote, 

 “A Europe driven by self-determination of peoples … is ungovernable … ”

One of the main ways the 1% can most effectively neuter democratic power (in a way that they can claim it is not their intent at all) – and the regulatory attack contained in the Trade Agreements is just one example –  is to advocate professionalizing governance. This has the advantage of sounding good on the surface. Who wouldn’t want professionals giving advice? In practice it will mean that although anyone can still be elected (that can be left in place) there will be a new insistence that they MUST – not ‘can’, but MUST, take the advice of professionals – corporate professionals. And as noted above a good step towards this has already been proposed for trade regulations in the corporate submissions to the TTIP negotiations.

The 1% and their media outlets will argue that Amateurism is no longer good enough. After all would you want an amateur heart surgeon, or an amateur nuclear engineer? No of course not. So why would you want amateurs to make decisions in any other sphere of governance? Elected officials are amateur. The experts whose ‘advice’  they, till now, “could” take, they from now on MUST take. And luckily there is precedence for this. Already when it comes to government ‘regulation’ of financial enterprises they use, retain, rely upon (you chose the phrase you like the sound of) the big 4 accountancy firms to do it for them. KPMG, not the government, inspects the books and signs to say that everything is tickety-boo and all the corporate bosses and their political friends then have to do is smile for the cameras. And it worked ‘really well’ in 2008 – in the sense that ‘The Regulator’ said whatever the 1% needed them to say at the time, until it was too late for anyone to do anything about it. That is precisely the kind of ‘regulation’ the overclass need going forwards.  Thereby, “No regulation without consultation” gets expanded to “No laws without consultation”. And of course that ISDS system of arbitration could be easily expanded to other spheres of government and used to stop any laws or changes to laws taken without or against ‘professional’ advice.

If any of this is put in place then it has the wonderful effect of leaving the politicians effectively powerless, but still in place so as to be the focus of blame. The 1% will hold the real power but the politicians will always take the blame. Any time things go wrong it will be because they made a mistake or did not follow advice as well or as fully as they should. Nothing will ever be the fault of the advice or the advisors.

As long as the 1% make sure the politicians are well taken care of after office, then there will be plenty of takers for the jobs. How utterly empty would the pantomime of our democracy be then?

So far this has been about taking from us. What about giving to them? Let’s not forget they have needs too.

4) From bail-out-cash to assets-for-pledging.

We all know banks would have died if it were not for the Trillions (yes, it is now counted in trillions) in public cash we have pumped in to them since 2007, to replace the flow of cash their brilliant loans should have been bringing in but of course weren’t and never will.  And that flow of public cash in to the private banks continues. Despite yet more empty lies about the banks being fine and fixed, as I said above we are not fixing them we are feeding them. The latest feeding will be when the  ECB gives them another third of a trillion in TLTRO (Targeted Long Term Refunding Operation) which replaces the sad, plain old LTRO of the last few years which gave the banks a trillion or so and was supposed (both times) to be the definitive fix. Of course since the LTRO ‘fixed’ things two major european banks still had the ungrateful effrontery to collapse – Banco Espirto Santo in Portugal and Monte dei Paschi bank in Italy. Right now all the other European, ‘not-in-need-of-any-help-being-perfectly-fixed and fine-thank-you-according-to-several-official-and-therefore-absolutely-trustworthy-stress-tests’ banks are lining up to take another third of a trillion. This, we are told will not only fix them…again…not that they need it, but will also encourage them to lend in to the ‘real’ economy. Which, oddly, we were assured the previous half dozen fixes were also going to do. But necessary as this sort of direct cash bail out still is, there is another pressing need which the bail-outs do not address. And that is the on-going but now rather accute need for assets which can be pledged as collateral for loans.

The reason assets are in many ways more important than cash is that although cash keeps imminent death at bay, assets, pledgeable ones, are the key to profit.

Banks want assets. The kind they are looking for are physical assets which produce wealth – like factories, or frackable land, or electricity grids, or ports, or telecoms systems. Assets that, unlike money, cannot be so easily withdrawn, tapered or ‘tightened’. The kind of assets  a nation might have, funnily enough. The banks don’t want these assets in order to use them to produce wealth directly, but rather to use them as collateral for creating more credit and debt. To think of the value of an asset in terms of the wealth or profit it can produce by its productive nature, is to be so very last century. It’s akin to thinking the value of a stock or share is to hold it and watch it go up in price. The real value of the stock or share is in trading it up and down as fast as possible. Let some slow-poke sit and just watch it. Similarly the value of an asset is vastly greater when thought of as the means for expanding the system of credit and debt. In the real world of making stuff, an asset like an electricity grid or a factory only makes the profit it makes. But in the world of credit and debt the same asset can be pledged over and over to create more and more credit. I pledge it to you and get a loan. You pledge it to someone else and you  get a loan. The system has grown twice. Have a factory and you get the profit it makes from its widgets. Use the title to that factory as collateral to get a loan or extend a loan (if you are a bank) and you and the rest of us in the system can use the same asset over and over. You can create a loan based on its collateral value. Or you could hypothecate your claim on the asset to another bank who can re-hypothecate the same asset and so on. And everyone else can write derivatives based on its value going up or down. Till we are all rich in paper credit and debt.

Of course we all know that if the music should ever stop, it’s the factory itself and the slow old boring profit it makes from selling widgets that survives while the paper turns to ash. Which would make you think that the smart people would play the credit and debt game for a little while but then cash out and buy up the real stuff before the music stopped. And that is, of course what they all tell themselves they will do. The problem is that as soon as you get out of the endless creation of paper debt and credit and buy real stuff you are in effect leaving the fast lane and driving back in the slow lane. Those who stay in the fast lane a little longer will do better that quarter and make you look like a loser. No one in the financial world can survive long as a loser. So there is a terrible pressure to stay in the fast lane just a little longer. Which means they all do. No one wants to be the first to lose his nerve and get out too soon. This is the nature of bubble growth. It is always better to stay playing the bubble. It is the nature of a bubble that even the smart players, who know it is a bubble, will want to hold and trade bubble assets rather than the boring, low growth real ones it is all ultimately based on.  And that is why they always, without fail, get caught holding them in the end. And then demand we bail them out. Which is how assets beget debts which beget the crash which beget the demand for a bail out so it can all start afresh.

The question is how to get your hands on those assets for a good price? The old fashioned way would be to invest wisely and buy it. The new way is to try to buy them at fire sale prices from a debt burdened or defaulting sovereign who you are ‘advising’ on how to cut its debt or pay its bonds by selling state assets. Of course the obstinate problem is that sometimes people don’t want their governments to sell off their nation’s treasures and assets. As long a some tattered shreds of democracy remain, this can hinder the process of looting.

At the moment nations can still default and force bond holders to accept a ‘hair cut’ – meaning a loss on their loan. This is always portrayed by our loyal media as some sort of crime against nature and an evil plot by crooked politicians. Despite the fact that when you lend money (and buying a bond is just that) you do so knowing you are taking a risk which is precisely why you are paid interest on your loan. So the risk of a loss is known and agreed at the start. And let’s remember most of the money made on bonds is, in fact, from the buying and selling of the risk of default. The trade in CDS (Credit Default Swaps) wouldn’t exist without it.

Of course if a corporation should act unwisely, go bankrupt and force losses on their bond holders – pick your example – Chrysler, AIG, GM, the S&L’s there’s an endless number – this is seen as a perfectly normal, if unfortunate.  But it is clear that there is a push to put a stop to nations being afforded the same right.

At the moment the major victory, which I mentioned above, is by the latest Supreme Court rulings in the US in favour of the Vulture funds against Argentina making it harder for any government ( I am thinking or Ireland in particular) to put the good of its people above the good of the bond holders.  The rulings make it now very likely that more and more bond holders will refuse to engage in any sort of voluntary agreement to restructure sovereign debts. The problem is, this route, the Vulture route, can take a long time and requires specialist lawyers. Not every bond holder has that expertise. They, the majority, need another quicker, easier route to getting their hands on national assets.

Here is one way I think they could do it. If I am right, and if this is a viable way, then they will have thought of it already and should be busy working out the legal fine print and preparing the politicians to agree to it.

In a nut-shell, I think nations will be urged to issue a new kind of sovereign bond which would be the equivalent of a corporate Covered Bond or, as they are sometimes known, a Pfandbrief. Don’t be put off by the jargon it’s quite simple. Should the borrower default or go bankrupt, a normal bond gives you a claim on the general pool of the borrowers’ remaining assets. But all the other bond holders have the same claim.  So you must all wait for the auditors to sort out what assets there are to be shared out and who gets how much back. Then you all form an orderly line with those holding the most senior bonds at the front and those with more junior bonds at the back. If the pool of  assets runs out before you get to the front of the line, then you go away empty handed. I’m simplifying but that is the general way it works. Except for one group of bond holders – those who have Covered Bonds or Pfandbreif, because those bonds not only have general claim on the pool of assets but have a unique claim, written in when the bond was issued, on assets that were ring-fenced as the specified collateral for those bonds ONLY. Those bonds have their value ‘covered’ by a specified group of assets. 

Now at the moment when a company goes bankrupt what we mean by ‘assets’ is everything: Cash, investments and any and all physical assets,  which means buildings, land mines, oil fields, and equipment, from machinery to paper-clips. However, nations are not considered as companies (YET). The 1% has encouraged the talk of UK Plc but it is not YET a legal reality. Which means when a nation defaults it does so because it says it does not have the cash (from financial holdings and tax flow) to pay the bond which is due for repayment. Till a few months ago no one had the right to claim for themselves a nation’s assets in payment of a debt. Nor had they any legal authority to force a nation to sell assets to get cash to pay a debt.

But over the years this presumption has been eroded. The privatization programmes of Thatcher were a major step in governments claiming the power to dispose of the assets of the people, as that government of the day saw fit. The recent rulings in favour of the Vulture funds have been another important step in giving the corporations  new rights – under US law only so far – to seize sovereign assets wherever they could. Which, in effect, means. if they could get their hands on them without the use of an army – such as seizing assets held in a third party bank or another country which would comply with the order. Thus a private custodial bank might agree to give the contents of a  sovereign nation’s accounts to a Vulture fund. Or a country in which, for example, Argentina had moored a state ship might agree to impound that ship till the Vultures could swing by and pick it up.

BUT a Covered Bond would make life so very much simpler for the bond holders. If a nation was induced to issue a Covered Bond then it could be written in to the agreement at the start, which national assets – a train system or oil and gas fields – were the specified and pledged as collateral for this particular bond. The government in charge when the default happened could then say to its electorate, “We’re terribly sorry but its right here in the small print – you – via your government agreed to forfeit these assets if you failed to pay. This is international law which we must obey.” And THAT last phrase is the key which opens the door to the future the 1% want.  A future were International Law is held up as the new supreme, and completely non-democratic arbiter of right and wrong. International law would be the new god. And like god would be above the whims and breezes of merely popular wants and desires. People already see the law as somehow above democracy, forgetting that democratic governments wrote the laws and have the power to unwrite them if the people so direct them. This last point is the one will be overlayed and suppressed. I will come back to this.

But back to Covered Bonds. It would be a simple matter for a compliant government – an ably advised one of course – to issue such bonds in the people’s name. Will nations be stupid enough to go for  it? Well the ‘nation’ might well object but that’s precisely what politicians are for. Elected politicians would be willing to do it today – except for the fact they know they would be thrown out of office immediately. So what is needed is a major media campaign complete with paid-for experts and pundits all saying how the way forward for nations who are presently unable to access the bond markets is for them to issue Covered Bonds. Get experts from Germany to talk about the long history and success of the German Pfandbrief. Have them talk about how banks that have issued such bonds are considered among the safest. Link together in the popular mind the issuing of Covered Bonds with the general idea of safety and prosperity. Never mind the one doesn’t cause the other. Don’t mention what enormous rights they would be giving the corporations nor what a huge part of their sovereignty they would have signed away. Don’t let these things be mentioned. Then move on to suggest that issuing such covered bonds would lead to greater investment even for nations that are not having trouble issuing bonds. As soon as you have made this link between issuing these kind of bonds and ‘greater inward investment’ the job is almost done. It is this link to attracting greater inward investment which is being used to sell the Trade Agreements, Bilateral Investment Treaties and the Investor State Dispute Settlement mechanism, saying that it is only those nations who agree to them, who will benefit by attracting more investment. It isn’t true, (there have been several studies the first in 2002 by the World bank concluding it isn’t true)  but as long as we keep saying it is, who will argue? And people will eventually come to think it must be a good idea.

In the Covered Bond future a hideous inversion will take place. Once upon a time bonds were issued so that a nation could build up a wealth of essential infrastructure such as hospitals and roads, and to develop natural resources for the benefit of the entire nation. In the Covered Bond future those resources and national treasures would be pledged for nothing more than raising more debt and would, after another financial crisis and the deluge of new bail-out demands it would bring, undoubtedly hand over their ownership to the bond holders. And it would all happen without a Vulture having to stir from its perch and where any murmur of discontent would be met with righteous sermons about the sanctity of international law.

5) From National Treasures to State Monopolies.

Of course it will not be quite that straight forward to prize a nation’s assets and wealth from its people’s ownership.  Other ideas will have to be changed as well. National Assets must be re-named as State Monopolies. Instead of talking about, for example, how efficient a national health system is, or what good care it provides per capita expenditure it must be referred to, darkly, as a State Monopoly and all the talk must be about how bad monopolies are. No attention must be paid, no reference ever allowed to studies by the WHO or this one by the Commonwealth Fund that have consistently found,

The United States health care system is the most expensive in the world, but…the U.S. fails to achieve better health outcomes than the other countries, and … is last or near last on dimensions of access, efficiency, and equity.

No mention of such studies must be made. Instead all talk must simply concentrate on how restrictive state monopolies must be and how they must limit ‘choice’ and allow inefficient and greedy public workers to burden everyone else.  And wouldn’t you know it, the effort is already under way. Here is a paper from the Fraser Institute in Canada calling state education a State Monopoly. The Fraser Institute is resolutely free-market and is funded by the likes of ExxonMobil and the Koch brothers.

The paper doesn’t claim, because it hasn’t any evidence to support any such claim, that the State school system educates badly or that for-profit schools are a better way to educate a nation. Instead it simply says how bad monopolies are. How they restrict choice.

Canadians rightly complain about protected industries – whether it’s dairy products, telecoms, banking, or transport – and the consequences in the form of less choice, poorer service, and/or higher prices….

The paper then begins to talk about education as if it were a ‘protected’ industry. Allowing it to elide the harm done by monopolies in the market, with free education.

 When government is the sole supplier of services, the options for consumers are extremely limited.

Of course in the case of the NHS in the UK where the government is the sole supplier and it is, therefore, a State Monopoly the result has, for several generations, been a health care system that is cheaper and better than the US free-market version in almost every single way.  You may hate the conclusion on ideological grounds but, in fact, all the actual evidence is on my side.

But evidence has never been the concern of the global overclass, has it?. Fear and greed is more their currency. And so the assets of every nation are to be denigrated along with those who work in them, as inefficient and staffed by greedy, lazy state-worker parasites bent on restricting everyone’s ‘choice’. If enough people can be taught to hate the teachers who teach their children and the doctors and nurses who care for their parents and if a general culture of hate-thy-neighbor can be engendered, then the Over-class will be significantly closer to asset stripping your nation – with your help. You might imagine an Orwellian slogan of “Give up ownership/Get more Choice!” Believe it at your peril.

This is speculation, of course, but papers like the Fraser institute’s make it not so much ‘groundless speculation’ but more ‘extrapolation from what already is’. There already is a firm intent to privatize education in those countries where state education is good, and a huge desire to privatize all the state health systems that DO WORK and DO deliver fantastic services, like the NHS in the UK, because they would be priceless assets to strip. And every nation has natural resources which, like the common land of centuries ago, the over-class would like to enclose using exactly the same argument they used to clear the Highlands and enclose the Common Lands of England – “Oh they’ll be so much more valuable and productive when accumulated in our private hands than if we leave them distributed among the unworthy commoners.

It warmed for them a few hundred years ago. They are hoping it will work for them again. We must stop them and not only do I belive we can, so do they.

Which is why discrediting democracy itself, above all else, must be the urgent task of the Over Class.

At the risk of your ire I am pausing again here. I hope that the argument so far has provided sufficient to disagree with, comment upon, refine and improve so that you will forgive me for holding back the last few sections.  It seemed to me better to get this much published, and give people a chance to comment rather than deliver it as one enormous lump. Anyway the last part will be finished soon and will follow shortly. Promise. 

Before we go I wanted to say thank you – to all of you who come to the  blog to read and think and sometimes to comment and add your thoughts. I know I have written painfully little and I am doubly grateful that you have stuck with it. Thank you to those of you who recommend articles here, to other blogs. Thank you to Jesse for picking the odd article and for highlighting articles over at Jesse’s Café Américain.

I also thought I would leave you with a scattering of thoughts.

How to deal a mortal blow to American power

There was recent announcement that the BRICS have agreed to launch a new Development bank with a $100 billion currency pool to aid countries with liquidity shortfalls. The major backer of the bank is China contributing $41 billion.

The bank will I have no doubt clear and settle certainly in Yuan and perhaps in Roubles. It will have good  working relationships with Hong Kong. 

Of more interest to me is that it will be headquartered in Shanghai. 

It seems very clear that the Chinese  and their economic allies in India and Russia as well as all the countries who are fellow travellers and variously disgruntled with Washington’s high handedness  are aiming at increasingly by-passing the dollar. The raft of bilateral agreements to settle in Yuan or Roubles that have been signed between China, Russia, Australia, Iran, various South American countries and the EU all serve notice that the days of the dollar’s pre-eminence are now numbered.

Of course the reserve status of the dollar is important for how much debt the US can carry. But even if the Yuan and the euro begin to account for a far larger proportion of international settlement this does not eradicate the dollar’s importance nor its status. obviously the euro is aiming at being used to settle gas contracts and possibly some oil contracts. If America continues to piss off Iraq’s new dictators then they could well decide to settle their contracts in euros or roubles or Yuan. 

But I think there are two further important step to watch for.  One is to do with banks, the other with courts.

The other half of the power the dollar gives America is that settlement of contracts in dollars means every nation has large dollar accounts which it uses to settle accounts and pay debts. These accounts are held in the small number of global Custodial banks. I think, from memory there are about 4 majors and they are all American: Citi, JPMorgan Chase, Bank of NY Mellon, State Street. These banks house trillions and are one of the choke points used by international lawyers. 

When Washington wants to enforce its will on a nation or when American vulture funds want to sue a crippled debtor the Custodial banks are the choke point they use. When Elliott Associates wanted to sue Argentina they did so by taking the Custodial banks that held Argentina’s money, to court and got those banks to freeze Argentina’s accounts. So the first thing I am waiting for is for the emergence of a non-American, Asian or at least Asian based bank to become a major Custodial bank.

The second thing I am looking out for is for that bank to be based NOT in NY. The bank cannot be based in NY because if it was then it would be subject to American law and specifically it would come under the jurisdiction of Wall Street’s ( and therefore Washington’s) court, which is the Southern District Court of Manhattan. Where you will find the lovely and completely independent Judge Griesa.

Griesa is Wall Street’s hanging judge. And his last judgement against Argentina and in favour of the Vultures was upheld by the US supreme court. That decision meant that Argentina will now be crippled with copy-cat appeals for payment from bond holders who had previously agreed to accept a lower settlement. More than that the judgement deals a huge blow to sovereignty in general setting a powerful precedent against any idea of sovereigns having the ability to protect themselves in bankruptcy. A protection that the private companies, including vulture funds themselves DO ENJOY. The ruling rules in favour of one strand of international law – the strand which greatly favours private capital and ignores the other older strand such as the Calvo doctrine) which gives pre-eminence to sovereign not private rights.

America is the home of vulture funds and houses the court that rules in their favour.  Those courts ruling over those banks is a major part of the projection of American power abroad. Set up a non-american bank to house those funds, and put it in a non American jurisdiction where American courts and Washington’s political power is not served and America will have been dealt an entirely peaceful but crippling blow.

So the choice of Shanghai for eth new bank is interesting. There is little attraction in avoiding American political power if you saddle yourself with another equally aggressive power such as China. So what is needed is a place beyond Washington’s reach but also not tied to closely to either China or Russia. Who would want a custodial bank subject to courts in Moscow or Beijing? Shanghai is a good place. It is less tied to Chinese banking interests than Hong Kong but still protected from America the way that Singapore, for example, might not be.

If you want to cripple American ability to enforce its will on other nations setting  up a major Custodial bank outside of Manhattan would be a very good step. The steps taken so far – increasingly by-passing the dollar when settling international accounts in favour of euros or Yuan followed by setting up a lending facility for nations in trouble that is not in dollars, avoids dollar accounts in American banks and is not controlled by the IMF are all the necessary steps which lead up to breaking the stranglehold of American custodial banks and the court which rules them.

I shall be watching.

Next a small question I have been thinking about –

What do the stock or bond markets  measure?

Once upon a time, in the fabled era of  “buy and hold” when blue chip companies made stuff which people bought, stocks were thought to be a measure of the likely future profitability of the company that issued them.  While bonds were the sedate grazing ground of what were then still just the gentle benthic giants of the financial world, the pension companies and banks.

Then something changed.  In fact almost everything changed.

Stocks Surge Most In A Week On Worst Economic Data In 5 Years

As Zerohedge reported, the deputy chair of the Monetary Authority of Singapore (Lim Hng Kiang) said last night at a dinner that “an uneasy calm seems to have settled in markets” and that “we remain in uncharted waters.”

The way stocks and bonds continue to levitate no matter what the news has been a strange factor of our ‘recovery’. There are so many indicators which all point down that the upward march of the stock valuations is odd. GDP has not rebounded anywhere, to any degree sufficient to warrant the Dow at 17000. Even the market cheerleaders admit the recovery has not brought with it employment other than a huge increase in part-time and low paid jobs. So what are the stock movements tracking or reflecting? It seems to me they no longer reflect any economic fundamentals but instead political ones. Of course the political was always a part of what the markets noticed. But in the past the political was a smaller part and the economic profitability of the company in question or eth market in general was the larger part. Today the health and viability of the entire market and the companies who  float in it are entirely dependent on political fiat and power.  Today the stock markets are a measure, I think, of the perceived grip of the global over-class on the levers of political control. Bad economic news hits, but what counts is not that news, but the market’s estimation of what that news might do to the ability of those in power to maintain their grip on power.

The dynamic is news hits, and the market looks to see how destabilizing that news might be to the political status quo. The questions are all political. Will loose money continue? Will lobbying for further loosening of not-yet-even-in-place regulations continue? Is the will to replace national regulation ( which is far too close to democratic review) with international agreements like the TPP and TTIP and best of all TISA still ascendant? If the news does nothing to derail the political underpinnings of the present golden era then no news is bad news.  If you allow any of the above then the stock and bond markets are a measure of political control. The market measures the global overclass’s belief in their own grip on power.

To me it makes complete sense to see unemployment remain high,  austerity cutbacks eviscerate public services and the gap between the have-it-alls and the have-nothings to grin wider and wider and yet have the stock markets rise and rise as everything were fixed. Because what the market indices are measuring is the fix.

The Dow is a measure of political control not economic health.

What will sustain it?

It’s all very well watching the global overclass congratulate themselves on their own omnipotence but what will sustain their powdered and gilded society next? Like everything else in their world even their time is borrowed.

They gorged on  bail outs and then when that caused too much political grief they moved on to cheap central bank money (superlow interest rates and hundreds of billions in bond buying) as a substitute. Same money, same junkie fix, just a different means of delivery. But now what?

All that money has allowed three things, M&A’s and junk bonds and buy-backs. M&A are always talked about in terms of ‘synergies’ and creating behemoths and market leaders etc. But what are they really? I suggest M&A’s are better seen as cannibalism. A room-full of spiders with nothing to eat but each other. Eventually they must consume each. For a while the victors in the grisly struggle are plump and flush. But as time goes by they each need larger and larger prey just to survive and there are fewer and fewer of them. At some point even the survivors will starve.  M&A is a familiar phase in a market end game.

Buy Backs are when a company uses cash to buy back its own debt when that debt is cheap. The company spends its money on reducing its debt so it can say look at me I have low debt and must therefore be healthy and not at risk of not being able to service my debt. Of course the down side is the company is spending all its money on the sterile exercise of reducing its debt burden rather than on R&D or on capital investment in production. It is akin to drinking your own piss instead of looking for water.

And junk bonds. High risk, high yield bonds. The same regime of easy monetary policy/low interest rates which is keeping the financial sector alive ( high rates would kill them and they know it) but those low rates mean it is also impossible to get a rerun on an investment. So how do you get those bonus getting returns? the answer is to look for risky assets, risky loans  which do give a good return.

Easy money makes junk bonds desirable and also makes them work – for a while. The Banks want junk. The growth in junk bond issuance has been spectacular because the banks and pension funds ( devious routes)n and ETF funds (who are the banks in another guise) want the return they promise. But easy money also means the banks who buy the bonds with one hand, can lend to those junk companies and ensure their junk bonds don’t default. Neat trick. Till the market turns then the hand that lends closes and the companies can’t roll their debt from one loan to a new one which means they default on their junk bonds. Which makes those bonds crash. So many of those bonds are now sitting in the ETF market that that market will transmit the shock wave. And as I have argued in the articles I wrote about ETF I don’t think the ETF market is resilient at all despite its claims. I think the ETF market will collapse like Sub-prime did before it.But what do I know?

So what is next? What will keep the show going if loose money and the search for high yield have both been tapped out? I think the next phase is a push for deregulation. Higher leverage must be allowed again. Lower regulatory capital requirements is also a must. Both will be argued for. Lower Regulatory Capital can be achieved by allowing derivatives to be counted as regulatory capital. A major push for that particularly in America. And allowed much more freely as collateral at the FED and ECB.

What is government for?

The State is not the to serve the people. Those who currently control the state have come to believe the role of the state is to ‘help’ the ‘wealth creators’. The wealth creators are the 1%, the global overclass who have declared that they are th ones, the only ones who can create wealth. WIthout them we would all starve because we do not know how to create wealth. We, according to them, only know how to reach for hand-outs. And unless we are controlled by the state that is all we would do.

So the new job of the State according to the Wealth Creators, who just happen to be the 5% who own most of the financial assets of the world – the  very same assets that were nearly wiped out in the crash but which were saved when we bailed them out resulting in their wealth increasing hugely while we were told we had to tighten our belts  –  is to manage the expectations of the public should they get restive about bailing out the banks or start to question why banks who launder money avoid taxes are too big to fail and too big to prosecute – and if that fails then manage their actions (with water cannon if necessary).

Finance is politics. Economics is war. Peace is imposed. Thought is monitored. And freedom ? Well freedom has gone underground.

See you when I get back. Hope you will forgive this run of loose thought.

I think the signs are already there to suggest ETFs are where the instability and risk is accumulating. If I am in any way correct then ETFs will be to the next stage in our on-going state of siege-mentality crisis what CDOs were to the last.

In part two I looked at exactly how,

…the clever boys and girls of finance have found ‘innovative’ ways of pumping those ETFs up a bit, just like they did to Securities.

I detailed the alarming number of different ways ETFs and their market are being mutated into a monster of instability just as securities, CDOs and the like, were before them. I wondered about how many ETFs would be stuffed with high-risk sovereign bonds but held with a risk weighting of zero? I ended by suggesting that the claims being made for ETFs, of access to high returns via a product that massages away the risks, were as false now as they were when the same was said of mortgage backed securities in 2007.

I ended by saying,

ETFs have in their DNA everything it takes to become monstrously dangerous. They are wide open to all the fraud and shitty behaviour the banks seem not to be able to stop themselves from bathing in. They are awash in leverage and riding on a tide of derivatives which hide so much concentration of counterparty risk that it makes a mockery of ‘risk management’.

I haven’t written much about ETFs since, except for one brief update on bank etfs.

Then this week I have read a flurry of articles which set the alarm bells ringing.

First there was Andrew Haldane’s testimony before MPs at the House of Commons. Mr Haldane is Director of Risk Management at the Bank of England and in my opinion by far the brightest person there.

Mr Haldane made his bosses at the BoE very uncomfortable when, as the Guardian reported,  he rather bluntly told MPs,

 “Let’s be clear. We’ve intentionally blown the biggest government bond bubble in history,” Haldane said. “We need to be vigilant to the consequences of that bubble deflating more quickly than [we] might otherwise have wanted.”

As if one cue Mr Bernanke confirmed earlier hints and guesses that the FED would start to reduce its bond buying from its current level of $85 billion a month, at some point this year . The response to which has been days of frantic selling of not just bonds but everything not nailed down. This served to accelerate a sell off that has been going on globally for the last month.

The Hang Seng in China has lost 10.62% in the last month. The Nikkei is down 8.6% In Europe, the FTSE has lost 7.8% while the Italian market is down 11.94%. In America the DOW is down 3.5% while Gold has lost 7.45%. All in one month.

At the very least this makes rather clear that at least that much of the traded ‘value’ of everything was never anything more than the bubble price inflated by the floods of central bank money flooding every market. The question unanswered is how much more of the value of stocks and bonds will suddenly turn out to be similarly illusory?

And that uncertainly is making the markets more and more volatile and unstable. Which brings me back to ETFs, because the marketing claims for ETF are that they give smaller investors a chance to ‘get exposure’ to – which means invest in – products that are normally only available to very large investors, such as sovereign bonds, or are not normally available locally such as foreign stocks and bonds from Korea or China for example –  or because they would normally be thought of as too risky and volatile.

But ETF’s claim to make the exotic available locally, the volatile stable and safe and the institutional sized, available in bite sizes. And people have been buying into the promise of return without the risk – again.

An Article in International Financing Review had the headline,

DERIVATIVES: Deutsche anticipates ETF ‘mega-trend’

The article began,

As a result of what it identifies as a ‘mega-trend’ within the investment industry as ETF inflows continue to grow at record levels, Deutsche Bank anticipates 50% growth of assets under management in its passive investment business by 2015, with fixed income ETF’s playing a significant role in that target.

A mega trend from ordinary stocks into ETFs.

In 2012, net new inflows into ETFs totalled US$262bn – the highest level on record for the industry. And 2013 remains on course for yet another bumper year with net inflows year-to-date at US$110bn – already 30% up on the same point a year ago.

Impressive or concerning as this growth is, it is the growth in what are called ‘fixed income’ ETFs which caught my attention. Fixed income ETFs are those which invest in bonds: corporate, municipal and sovereign. Most ETFS have some bonds in them but some, the Fixed Income kind, specialize.

According to a report  from Blackrock inc.  the world’s largest asset manager and one of the largest ETF managers as well, in an article at Bloomberg,

Fixed-Income ETFs to Own $2T in 10 Years

Exchange-traded funds that buy fixed-income securities may boost their assets more than six- fold to $2 trillion in the next 10 years as they transform the way bonds are traded, according to BlackRock Inc.

According to the Deutsche Bank study as the amount of debt in the world goes up – as it already dramatically has,

The funds will also benefit from a likely shift in the average investor’s holdings to include a greater proportion of debt, the report says.

Of course part of the reason the average investor will choose to hold more debt is because he will have been assured that with ETFs he will be able to ‘get exposure’ to the higher returns without any great risk. And in part that assurance will rest on the sales pitch which says, ETFs are a way of investing in a basket of products carefully chosen to track the whole market, rather that investing in a single stock or bond, AND unlike more old fashioned types of funds, which can only be sold at the end of each day, with ETFs you can trade them minute by minute just like stocks.

So according to those who sell ETFs it is all good.

“It’s really changing how to invest in the fixed-income market” by making it more transparent and liquid, Tucker, head of BlackRock’s iShares fixed-income investment strategy…

More transparent – you know what you own and more liquid. Liquid – that word again. Of course it used to be that securities, especially mortgage backed ones, and the CDOs based on them, were very ‘liquid’. And those who traded in them, especially those who traded in the CDS insurance, like AIG, which made such securities so super safe – they used to be the ones who provided all the liquidity. Until of course they didn’t. But that was then and this is now and the banks and brokers have all learned so much and everything is so much better and safer that nothing like that could happen with ETFs – could it?

21 st  June 2013  FT,

Bond market sell-off causes stress in $2tn ETF industry

A wave of selling caused many exchange traded funds to tumble below the value of their underlying assets as a bond market sell-off caused stress in the $2tn ETFindustry.

So if you owned an ETF of a stock it was worth less than the actual stock. Congrats.

According to Bryce James, president of Smart Portfolio, which provides ETF asset allocation models, quoted in the FT

“The losses for ETFs today were far beyond what the most sophisticated financial risk models could have predicated for worst-case scenarios,”

More than the models predicted fo even their worst case. Hmm, where have I heard that before?

Not only that but,

The selling also caused disruptions in the plumbing behind several ETFs. Citigroup stopped accepting orders to redeem underlying assets from ETF issuers, after one trading desk reached its allocated risk limits.

Oops. That’s called a lock in. You can’t sell when you would really like to and have to sit there while the value of the thing you are not allowed to sell goes down and down. So much for providing liquidity. Just like securities and CDOs before them, ETFs and those who make the market in them, provide liquidity when all is well but when everyone really needs it, when large losses are being made – the liquidity disappears and instead we are told of ‘rare occurrences’ and ‘risk limits’.

I described in those first two articles how this might happen through the concentration of ownership and  counterparty risk within a very few large players.

And it wasn’t just Citi.

Tim Coyne, global head of ETF capital markets at State Street, said his company had contacted participants “to say we were not going to do any cash redemptions today”. But he added that redemptions “in kind” were still taking place.

State Street, like Blackrock is one of the largest ETF players and market makers. They are the ones who provide all that yummy liquidity. Except on that day they didn’t, did they?

Of course everyone involved claimed this was a ‘very rare’ occurrence.

So let’s recap. Bonds are the biggest bubble in history. They are also the largest growth component in the bureoning ETF market which claims to be a safer version of what the securities market once claimed it was – safe, liquid and transparent.

I used to think ETFs were an accident waiting to happen. I still do. I just think the likely arrival date of that ‘accident’ has moved quite a lot closer.

I have thought more about what I wrote in The Humiliation of Greece and have come to the conclusion that I was, in part, wrong. So I would like to offer a sincere an unreserved apology to all those who read it

I would also like to offer an explanation of where I went wrong and finally an amendment to the argument.

An Explanation

The bulk of the article and its main argument, I think,  still stand. I think the argument about the Bond swap is fine. But where I went wrong was in regards of the proposed new law. In a nut shell my mistake was that I assumed  the proposed law giving up all rights to assets and immunity from prosecution, was a law which would be applied generally. I assumed the proposed law would apply to any default on any debts to any sovereign creditors. I think this is not the case.

I would like to say that one reader ballymichael did try to point this out to me but I was very slow to realize what he was saying. I picked a bad time to be obtuse and I would like to say both thank you and sorry to him in particular.

If I now understand ballymichael’s point it is that this law would apply to loans made by the Troika but not to other loans made by other nations or lenders.  Thus were Greece to default on bonds it had sold to China let’s say, then Greece would be able to default as would any other nation.

The knock on effect of this is that the final part of my article – which I did say was speculative – is wrong. Even if the private debts were counted as Sovereign as I suggested they could be, this would not trigger the proposed law. Thus this is not a way of recapitalizing private Greek banks and saving them from their debts. That will still have to be done by the means employed so far.

Embarrassed as I am that my specualtion was wrong I am also glad. The betrayal is not as foul as I had specualted it might be.

However, it is still pretty bad.

An Amendment

The new law would pertain only to those loans made by the Troika. The Troika being the European Union, through its various agencies including bail-out funds such as the EFSF and the ESM, and then the ECB and the IMF.  The problem for Greece is that the Troika is not really just one creditor among many. It is now Greece’s most powerful and main creditor. What this means is that because the central bulk of its debts cannot now be defaulted without the new law laying Greece open to being gutted like a fish, this essentially prevents Greece for defaulting on any of its debt no matter who the creditor was. Greece could default on debts owed to lets say the BoE or China but such a default would not clear enough of the nation’s debts ot make it worth while.

The more loans Greece ‘accepts’ from any Troika bail-outs the more this will be the case.  The ability to strip Greece in the event of any default confered by the proposed law makes lending to greece via the bail out funds such as the EFSF and ESM the ‘safest’ way to lend by far. If Germany wants to lend to Greece it can now chose to do so via the bail out funds rather that as nation to nation.  Other lending will still happen because it is clear the new law pins Greece down and makes any default almost unworkable.

Thus although my original argument was, as I have said, wrong, in many ways the new law still has many of the same wider effects as I had originally thought, just by a more round about way.

As for the speculation about Greece’s private banks and their private debts – as I said my speculation was wrong. Those banks and their debts will continue to be protected by the method used so far – Troika funded bail outs.

I hope you will accept my apologies.  It is a shitty way to end the year. But at least it was no one’s fault but mine.

I do realize that the currency of any blog is how trustworthy people feel it is. I hope this blunder has not shaken your confidence irrevocably.

There is always a danger – which I am very aware of – of getting out of one’s depth when trying to write about issues which depend upon technical aspects of finance and law. The worry of getting out of my depth is never far from my mind.  But the alternative is to go back to accepting the platitudes and bland assurances of those ‘smartest men in the room’, who have always claimed to know better and who would like nothing better than  for us to stop trying to understand and to stop asking questions.

I cannot bring myself to do that even when I find I have embarrassed myself so publically.

I hope 2013 brings you and yours rude good health and joy.

At the behest and on the authority of Prime Minister Samaras and President Papoulias, an amendment to Greek law was drawn up last week. There was no debate in parliament, the vote is still to be purchased. But unless this amendment is challenged or changed, the change it will bring in will alter the future of Greece and its people every bit as much as the day Greece joined the Euro, perhaps even as much as the day Democracy was re-instated after the long rule of the Generals. Only this change will be a giant step away from Democracy and towards subservience to an unelected elite.

You can read the law in its original here. Here is a translation of the key part.

«The Beneficiary Member State, the Bank of Greece and the Hellenic Financial Stability Fund each hereby irrevocably and unconditionally waives all immunity to which it is or may become entitled, in respect of itself or its assets, from legal proceedings in relation to this Amendment Agreement, including, without limitation, immunity from suit, judgment or other order, from attachment, arrest or injunction prior to judgment, and from execution and enforcement against its assets to the extent not prohibited by mandatory law».

The law says, should any future Greek government try to default in any way on its debts – by setting up a debt commission or by any other means, even one accepted by international law and precedent, then Greece chooses to relinquish all claims on the assets of the Greek people and the nation and equally relinquishes all legal protections from its creditors/bond holders. In other words, if a future Greek government tries to default, Mr Samaras and Mr Papoulias have guaranteed that the Greek people will forfeit and lose any and all rights to their nation’s assets including its national companies and natural resources and the law will not protect them. All those assets will be open to seizure by Greece’s bond holders. The vulture funds, vulturecrats and all the bond holders have been handed a loaded gun and a license to loot.

No nation has ever done this. The question is why are Greek politicians trying to do it and why now?

For the last two years two questions have echoed round and round Europe and occupied the elite who rule/own it – how to stop Greece defaulting and how to recapitalize its banks – so that neither can pull down the things Europe really cares about – Germany’s and Frances’s banks?

I believe passing the above law is an important part of the answer to both those questions. In fact, if passed in to law, it will, I think all but complete a Troika formulated policy begun with the much talked about but little understood, partial Greek default and bond swap, that was the first station of Greece’s cross. What is that policy?

Stop Greece from Defaulting.

There has been and continues to be much talk about ‘helping Greece not to default’. In actual fact there is very little real ‘help’ at least not for the Greek people. The intent of Troika’s policy for Greece has been far more directly to simply ‘stop’ Greece defaulting no matter what harm it does to Greece or its people. The policy has actually been to crucify Greece if necessary, and to deny her, no matter what, the release of default.

I believe this new proposed law is intended to put beyond all reach the release of default.

But first lets clear this law is not a one off. It is a continuation of a policy that the bond swap began. The bond swap dealt with only one part of Greek debt closing off only one potentially open door to default. The present proposed law closes off all the other exits in one stroke.

So let’s start by clearing away some of the misdirection that the mainstream media has so helpfully piled in our way concerning the debt swap that Greece undertook in March 2012 and about which so much has been written. First the debt being swapped was purely Sovereign debt that was held privately. I. E. by banks. So it did not cover sovereign debt held by other nations or central banks, nor any private debt, such as that issued by Greece’s banks. Only sovereign debt held by banks and other financial institutions.

Needless to say the debt/bond holders of those institutions have used every column inch they could buy or influence to tell the approved story of how they, the ‘wealth-producers’ of the world, as they like to style themselves, have been robbed by a nation of feckless, work-shy,’socialistic’, tax-avoiding, recidivist crooks. What actually happened is nearly the opposite.

Certainly, Greece did default/restructure this debt. So on the face of it it cannot be denied that the bond holders took a loss.  But as I have pointed out before, private companies default all the time. Default is not a crime against business, it is part of it. Neither restructuring debt nor defaulting it is  a crime.  Let’s look at the case of Chrysler – again. The management simply did the mathematics and knew that unless they could reduce their burden of debts they would not be able to get out from underneath them in order to make a profit going forward. Given that situation the management (Who by the way were the culpable ones for piling up that much debt) simply said – if we do not reduce this debt then the business is dead. Better to default some of our debt and allow a business that can make money to emerge.

That is all default is. A sensible way out of a disastrous situation.

Now when Chrysler defaulted they forced a settlement on their creditors of 29 cents on the dollar. According to the BIS (Bank for International Settlements)

In February 2012, the Greek government launched an offer to exchange €206 billion of bonds held by private sector investors for new bonds with a face value of about €100 billion.

So Greece offered very nearly 50 cents ‘on the dollar’. To me that’s a bail out in all but name because it is above what the bond holders would have got had they been selling in the open market. The Greek government made no attempt to get the best deal for their people, but instead offered the open hand of generosity for their banker friends while beating down on ordinary Greeks with a closed fist.

But the settlement with the bond holders was never simply about money ‘now’, it was perhaps even more about altering the future. This was a ‘restructuring’ with one purpose – to make future default or restructuring impossible. The bond holders got paid 15% of the face value of their bonds in cash up front. The important point, however, is that the rest of their 50 cents on the dollar came in the form of new bonds issued to replace the old. The important point, perhaps the main point of the exercise was that the old bonds, which were ‘Greek Law’ bonds were replaced by ‘English Law’ bonds. The difference between Greek law and English law bonds is important and valuable to those holding them.

In Greek law bonds there can be are what are called Collective Action Clauses which allow the government to impose on the bond holders an agreement which is binding on them all so long as a majority votes in favour. Thus in a restructuring the government can dictate terms and as long as a majority of the bond holders agree, however reluctantly, the rest have no choice but to acquiesce. This is what Chrysler did. This is exactly what the Greek government did to debt it had issued under Greek Law. In English law these clauses do not appear. Which means that individual bond holders, of debt issued under English law, can hold out against imposed restructurings and refuse to settle. The effect is to make it very difficult for a government to force a settlement on bond holders. Hold-outs can always block it and force a higher price.

What the Greek government did, with the blessing of the Troika, was use the collective settlement not only to offer the holders more than they would have got in the market – which mean as far as the markets were concerned that the banks were better off after the default than before – but to replace all the Greek law bonds which allow restructuring with new English law bonds that make it impossible. The deal made this restructuring the last Greece would be able to do.

So while the mainstream press obediently peddled the ‘poor bondholders being forced to accept default’ story – the real story was that thanks to English law bonds for the old Greek law ones, no future Greek government that was not convinced of the merits of destroying Greece for the sake of Europe’s big banks, or wanted to re-negotiate – like a possible left wing, Syriza government –  no such government, no matter what it promised those who voted for it, could ever again impose a collective default settlement upon the new debts.

The bond settlement was not just about giving to the bond holders it was about taking away from the citizens of Greece. Taking away from them their ability to chose certain futures.

Foreclosing the future 

Now let’s look forward to what might happen if the present coalition were to lose the next election and Syriza were to gain power. The Syriza leader, Mr Alexis Tsipras, has already called for a debt commission, and in any election that call or something similar, will be a central promise of Syriza to the Greek electorate.

But now consider what the chances would be of making good on any such promise. If Syriza were to take exception to the generous deal given to the bond holders and if they tried to change that deal in any way, it would be a technical default and the English law clauses would prevent any new deal being forced on the bond holders. The clause would stop any attempt by Syriza to reduce Greek debt by that route. That avenue was closed when the present government signed its generous restructuring deal.

So much of the ‘poor bond holders’ story. But the bond story only dealt with one part of Greece’s debt. It left untouched the part of Greece’s Soveriegn debt held by governments, central banks like the ECB and Fed, and by other international funders such as the IMF or the various European bail-out funds like the EFSF etc., and did nothing to ‘save’ Greece’s banks from the mountain of bad private debts they still held or which they had pledged as collateral to the ECB. These debts are what new law is for.

The New Law.

On the surface the new law pertains only to the debts of the Greek state and its institutions. And on their debts the proposed new law is rather clear. It says, should any new future Greek government, no matter the mandate given to them in an election, try to default on any of Greece’s remaining sovereign debt, now held mainly held by other governments, central banks and international financial bodies, then the Greek state and the government of the day would have no protection in law against suits brought against them nor even against injunctions served to restrain their assets prior to an actual judgement. This means a Greek government would not even be able to fight such a case because while they were trying to fight, all their sovereign assets would already be frozen.

IF a Greek government tried to default not only would it not be able to force a settlement on its English law bond holders, but nations and central banks to whom it owed money would simply be able to claim and then seize Greek national assets. They could start with those already held by them, such as Greece’s gold held abroad, but also claim ownership of any other asset such as Greece’s infrastructure of roads, rail, power, water, oil and lands.

In one fell swoop the new law would radically alter the situation of those institutions, such as the ECB, who are sitting on billions of Greek government bonds pledged as collateral by Greek banks. Up till now a default would have left the ECB, like everyone else, holding worthless paper and heading for the nearest court to file suit in the hope of eventually getting a judgement in their favour. Whose court and what judgement  no one has been clear about. In short the EBC and everyone else were holding debt that was not secured against any specific claim against Greece’s assets. They were, in effect, unsecured bond holders. The ECB would not like to see it that way but I think that is how it is.

The new law changes this. And I think the European poweres are well aware of this and it is why they insisted on this law being written. For let us be clear this law was created by the Troika for the precise purpose I have outlined. The law, or the idea of it, was there in the 400 pages of the memorandum that was drawn up to govern the Greek bail out back in February. The eventual adoption of the law, is there in the fine print as one of the preconditions for the bail out to be fully released. And now the Greek quislings have done their master’s bidding.

Because if the law is adopted, then suddenly, in a default, every one of the Troika institutions could point to Greek law and say, by your own sovereign law the Greek bonds/debt we are holding are secured against your national assets. Any default and the ECB could claim whatever it wanted to cover the value of the bonds it held. My guess is the ECB might fancy Greece’s financial sector, thus making the running of Greece’s economy from Frankfurt much easier than it is now.

Of course a Greek government would not have to roll over and agree. A Greek government could still alter the law and say we are still ‘the will of the people’ and we will not surrender any assets no matter what your claim. But in return Greece’s gold would be seized as would any other Greek sovereign assets held abroad. Greece would also find suits imposed on any banks that tried to do business with them. The suits would all be based on the new, proposed law.

Taken together the earlier bond settlement, replacing Greek law bonds with English law bonds, plus the as yet to be voted upon new law would make it almost impossible for an any future Greek government, to ever again default or restructure sovereign debt. Together they are, I think, how the Troika plans to stop, prevent, and outlaw Greek people determining their own future..

This is how the Troika intends to crucify Greece.

But as if this wasn’t enough I want to suggest one more deeply unpleasant thought that came to me when I was thinking about the purpose of this new law. This is speculation because it is based upon an interpretation of the law and I am not a lawyer. But I want to put it to you because if I am in any way correct it makes the actions of the leaders like Mr Samaras an even more horrid betrayal.

Private debts in Private Greek Banks.

What I have not yet looked at is the immense pile of bad private debts held by the insolvent Greek banks.  This would seem to be outside the scope of the proposed law. And this is a problem, because if those banks collapsed, the ripples of the event could spread and to where no one is quite sure: Commerzbank, Deutsche Bank, Unicredit, The Bundesbank itself, Credit Agricole, Soc. Gen. No one quite knows. No one wants to find out. And what of the elite of Greece? The elite families of Greece, and there are only a few, who own its banks and its oil companies, and whose sons have provided Greece with her Generals as well as her Prime Ministers  would face ruin if the private debts in their banks were to implode.

Of course this should be a private affair and nothing to do with the government and its debts. But, since 2007 we all know that such private debts have been made government business. That is the new world we have been brought to. Greece’s banks will require further assistance. Everyone is clear about that . So what if a future government decided, while it might not be able to restructure its sovereign debt, it could at least refuse to take on any more debt for the sake of ‘saving’ the private banks? A more left wing government could still allow banks to default. It could clear their debts, force their bond holders, whoever they were, to suffer the losses, and then nationalize whatever assets were left, and at least Greece would have a clean banking sector. Good for Greece. Not so good for the families whose wealth and power would have just burned down.

But now think what this new law would have to say about that. On the surface nothing you might think. So might Syriza. Private banks defaulting on private debts . Nothing the government could be sued for, even under the new law,

Sadly I think the new law is there to make sure the government could be sued even for allowing private banks to default on their private debts. How?

Think of how a bank, a systemically important bank, one large enough to cause a domino effect, has to be wound up. You cannot simply let it fall apart. That would be what is known as a disorderly insolvency. What has to happen, is an orderly insolvency that ensures the bank still fulfills its socially necessary functions as a bank for ordinary people and other businesses.

In an orderly insolvency, like Chrysler’s. or Northern rock’s,  auditors must be appointed whose job it is to sort out the parts that are still viable from those that are not. The viable ones are put in one business and allowed to emerge from bankruptcy while the dead parts are put in another financial entity which is overseen by trustees while its affairs are wound down.  For most companies this happens as an entirely private matter. A company like Chrysler simply stops making cars for a while until the legal and financial sums are done. But for banks it is different. People have to have access to their money. And for big banks their operations need to continue for the sake of lots of other businesses which rely on them. So in the case of banks the government usually steps in. In the case of Northern Rock or Bradford and Bingley in the UK or the Caja in Spain or hundreds of banks in America, the government takes over the failed bank. It becomes the temporary owner and the bank’s debts appear on the government accounts. AND THERE is the key.

For as soon as a bank failed and the Greek government stepped in, as it would have to, to make sure the default was done in the orderly fashion that would protect ordinary people and the wider economy, then the bank and its debts would become sovereign. And as soon as that happened I think any sharp lawyer, expert in corporate and international law, would be able to argue that the default was ’caused by’ or at least ‘overseen and controlled by’ the government and, as such, was a sovereign default.

If the government chose not to ‘save’ the bank and its debts but instead allowed the bank to default, then the new law would empower the banks former owners and its creditors to seize sovereign assets.

It might seem incredible, and it surely is, but if I have read the law properly I think there is a very good chance it would also be the case. Just think of the way the law allows Vulture funds to sue nations even for losses on loans the Vulture fund never had any interest in until it bought them up specifically so it could sue. Tell me my scenario is impossible.

If think there is a horrible chance that the proposed law would mean that any future Greek government would have no choice but to keep bailing out the private banks. It would makes the Greek private banks and those whose wealth and power is tied to them, invulnerable. They could not be allowed to default. the proposed new law, combined with the ‘English law’ bonds would prevents any future government from being able to do anything at all to change the debt burden of the Greek people.

This law, if passed, and I think it will, would make the wealth of the 1%, untouchable even in default. The law would says either they are bailed out or they have the right to take whatever assets they wish in lieu.  The new law, could, if I am correct, be used to recapitalize a defaulting bank by simply plundering the assets of the nation.

If this speculation, and this is all it is, is correct in any way, then one of the elite, Mr Samaras, framed this law knowing it would protect his fortune and power and that of his family and his friends and their families. A law by the elite for the elite. And one that would spell the end of any meaningful democracy in Greece.

It also means this. If the Greek people vote for Syriza and the promise of reducing their burden of debt and austerity, this law and the Bond changes will ensure those promises are all broken. If that happens the voters would turn against those who promised and failed. The Left will be seen as worse liars and rogues even than those they replaced. Many Greeks might then swing violently from left to right, in to the arms of far right nationalists.

And that would be the perfect excuse for suspending democracy and bringing in a ‘technocratic’ government, a dictatorship by another name, perhaps of outsiders, backed by the military if necessary. A bankers paradise. A paradise of the elites. Vote left, swing right. The future of Europe.

This law is the end game. It must be stopped. And it can be. The Greek parliament can, and in my opinion must, vote it down decisively. If not then any incoming government seeking to turn away from enforced austerity, examine the nations debts, to reject that which was found to be odious and to restructure the rest, would find the steel jaws of a carefully constructed trap snapping closed upon them. At which point the only option would be something very close to revolution.

But it would be that or and end to democracy and economic crucifixion.

Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.

Argentina defaulted on its debts. It borrowed money, said it would pay it all back, signed contracts binding it to that promise and then reneged. It forced its creditors to agree to get back only a few cents out of each dollar they had lent it. Argentina simply said, ‘that is all we are going to pay. Accept or get nothing at all’. The creditors, the bond holders, agreed. Except of course for the stealthily circling Vultures who bided their time.

Surely, despite the sordid stink of what was done to Argentina, how she came to default, on another level Argentina has also done wrong to those who lent to it and must therefore pay?  Well on one level sure. But before we wag a moralizing finger lets take a step back.  Borrowing and then not paying back, defaulting, is not a crime against God and Nature known only to the  dregs of statist madmen. Companies default. They take on debts, sign contracts to pay it all back and then default on their creditors. When they do it is often due to mis-management, stupidity, greed and even fraud. Whatever moral case we might think Argentina has to answer it is not peculiar to them or to the  bloated and corrupt governments which loom large in the minds of fervent Libertarians.

Lets take a recent example, Chrysler . In 2007 Chrysler had revenue of $49 billion. That makes it larger than many nations. It defaulted. The company had knowingly, not forced to by IMF inquisitors, but of its own free-market will, taken on debts that it could not pay. Did statues bleed, or horses give birth to monsters? Did the very heavens cry out at the crime? No they didn’t. It’s business. Just business.

What Chryser did do was use the sheer size of its possible default to force its creditors to accept cents on the dollar on what they were owed. Sound familiar? And the US government itself weighed in on their side to force the creditors to accept. Why? Because, they said, it would be best for the nation. And then the critical bit, (From “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and other Legal Fauna” Duke University School of Law)

Once Chrysler negotiated the terms of a sale with the majority of its creditors, it entered bankruptcy with a prepackaged petition, and, shortly thereafter, a new Chrysler entity emerged from the process as a going concern, no longer burdened by billions of dollars of debt.

A ‘going concern’ because it was now no longer crippled by an unpayable weight of debt. That is what Argentina had hoped to do.

Although a minority of creditors challenged the Chrysler sale as a draconian invalidation of their contract rights, those efforts failed under the debtor-friendly rules of Chapter 11.

So, for private companies the free-market has debtor-friendly Chapter 11. But not for nations? What Crysler did the Law upheld even as it pursued Argentina for doing the same thing.

And what are some of those debtor-friendly provisions of Chapter 11?

Once a private company or individual enters bankruptcy, debt service and litigation against the debtor is automatically stayed pending the completion of a mandatory restructuring plan. Bankruptcy rules also allow for a post-insolvency market for “superpriority” (debtor-in-possession) financing, which the debtor can access to jump start its reorganization.

So why is this a good ‘free-market’ idea for companies but not for nations? Why should something of the like not be available to nations?  There is no good reason – excpet one. Suing nations is lucrative AND it is part, I believe of a far broader wresting of power from nations states in favour of ‘The Market’. An ideological desire to elevate private over sovereign power. Or to put it another way to reduce nations to actors within a global market framework instead of markets and companies being required to act within a framework of soveriegn, nation state power.  The question is what levers can ‘free market’ ideologues use to force this change?

Pari Passu

The key to the Elliot Associates case against Argentina, the point of law used by them and ruled in favour of by Judge Griesa, and one of the levers that can be and has been used to attack nations, is what is known in law as Pari Passu – to treat equally.

I do not intend here to deal with the argument over whether nations need to borrow at all. I have some thoughts on this subject but they are for another article. All I wish to note here is that it is an odd thing, perhaps a legacy of the time when princes borrowed gold and silver from merchants, that nations who do not have to borrow, given that they can print instead, should chose to borrow. What is not at all odd is that holders of private wealth and creators of private credit, should be delighted to lend to them. Why is this not odd? Because nations are very large borrowers and, most of the time, very good payers.

The only down-side to an otherwise wonderful trade is that IF a nation should decide to default – how can a private creditor take an entire nation to court? The answer for centuries was they couldn’t. The old, English Common Law of Champerty prevented it.

Champerty is –

an English common-law doctrine that precluded the purchase of debt with the intent and purpose to sue upon it. (P.49)

A clear law which makes the very notion of a vulture fund impossible. At this point it is worth taking a moment to remind ourselves that the laws which codify what we mean by debt: who must pay what to whom and under what conditions are not natural laws. Debt and its laws do not spring from the fabric of reality like Gravity. Debt and its laws are human conventions that is all. We can see it one way or we can see it another.

Champerty said you cannot buy up a nation’s debt, when you know that nation has or soon will default, for the express purpose of then suing the nation. Champerty says the nation and its creditors are the only interested parties and thus they alone must be left to work it out for themselves. And since most of the lenders were the largest banks and other nations who  generally had long term and lucrative relations with the debtor nations, the lenders would generally feel obliged to swallow the losses.  And that reality ‘tended’ to give the lenders some pause for prudent thought when it came to how much they lent and to whom.

So for years Champerty did prevent nations being sued AND helped concentrate the minds of the lenders. But then along came the first Oil Shock/Crisis and the subsequent South American defaults of the 80’s in Mexico, Argentina and beyond, and the eventual game changer – The Brady Plan.

Each of these things, like everything else in this article,  can be seen in two entirely different ways. What you see depends on what you are told to look for, what you expect, what you want to see.

Sorry to introduce all these elements but I think it helps to know why things happened not just that they did happen. So to take them one at a time. The first Oil Shock was a crisis at the pumps but a bonanza at the well-heads. Suddenly the world was flooded, literally flooded, with petro-dollars (Oil was traded in dollars). That money belonged to the oil nations but it flowed to the world’s banks. Suddenly they had more cash than they knew what to do with.

So it was not a coincidence that a long list of nations who wanted to borrow suddenly found the taps opening for them. I’m not saying nations didn’t borrow or banks lend to them before. They did. But go back and look at the growth in lending just to Argentina – from $8 billion in ’76 to $43 billion in ’83. An increase of over 400% in just 7 years .

But then,

 A subsequent rise in interest rates and a global recession resulted in a string of defaults on these loans,starting with Mexico in 1982. (P. 50)

The banks let the  influx of cash go to their gonads and lent too much to ‘sub-prime’ borrowers, content to let them get deeper and deeper in to debt paying the banks more and more interest. The scale of the bad loans was sufficient to cripple if not bring down at least some of those banks. Sounding familiar at all?

Cue the Brady Plan. Officially a plan to save S. American nations (one way of seeing it), but equally, or perhaps more, to save the U.S. banks who would have suffered/collapsed if  widespread defaults had been allowed to go ahead. The Brady Plan repackaged the defaulting debts in to new bonds imposing some ‘hair cuts’ but off-setting even worse possible losses by various means AND, critically, allowing the new bonds to be sold to a far wider set of financial institutions. The idea – again stop me if any of this rings any bells with you – was, by allowing the new bonds to be sold more widely it got the risk off the bank’s books where it had been concentated  and ‘spread’ the risk more widely across the market.

Seen one way, the official way, the plan was to save the countries from default and ruin. Of course the countries were considered to have defaulted and their credit rating suffered. Which does seem to me to take the shine off the official version. But no matter. Moving on. The un-official way of seeing The Brady Plan is that it was a way of  preventing nations from defaulting and entering any sort of ‘Chapter 11’ restructuring and re-thinking of their borrowing and instead kept them firmly attached to their banks and their habit of debt dependency. Debt dependance is what was being saved along with the pushers who profited from the dependancy. The banks profited financially. The U.S. profited politically.

Of course both ways of seeing are there in the picture. Both have to have some basis in fact. I suggest my way is far more relevant than the usual story allows.

The point of this diversion is that this was the event which launched the modern market in the trade in sovereign debt which is such a boon to countries today. It was the birth of the era of sovereign debts as we now know them, the  place where the old order and old power structure of nation states and their citizens confronts the new and rival power of  the global Free-market and of nearly-but-not-quite stateless capital.

This was the arena where Mr Singer of Elliot Associates had his good idea – the idea that if he could somehow get rid of or find loopholes in the old law of Champerty, then he would be able to buy up debt when it was cheap – for a few cents on the dollar when a nation defaulted – but then sue that nation for the full 100 cents on the dollar. Elliot Associates are a law firm their expertese is in twisting the law to suit themselves. ie they are lawyers. Mine might be an unflatering description of what lawyers do for a living but I think it is nevertheless accurate.

Elliot set about challenging Champerty and to cut a long story short they succeeded. The key case for them was against Peru. Remember Champerty says it is illegal to buy a nation’s debt for the purpose of suing. Elliot’s argument, up-held in U.S court was that when they bought the debt (defaulted debt), their “intent” was simply “to be paid in full”, nothing more. There was no ‘intent’, no plan from the outset, to sue. This was depsite Elliot and the court accepting, as the court said in its ruling

“Elliott knew Peru would not, under the circumstances, pay in full.”

And yet the court accepted and agreed that Elliot hadn’t bought the debt with the express ‘intent’ of suing, only of somehow being paid in full. And they resorted to suing only when their original intent was thwarted. And that is how you get round Champerty.

That, to me, is a fine example of the law and lawyers at work. It has been described as ‘the narrow interpretation’ of the law of Champerty. I think that is the sort of narrow, like the eye of a needle,  that a camel would not be able to pass through.

But just to be doubly sure Elliot and Mr Singer also lobbied the New York State Legislature , the government of  New York State, to amend the laws of New York State  to remove the defence of Champerty. Which they did. Suddenly there is no defence of Champerty in N.Y. state, which means there is no such defence in Manhattan or in its courts and the Southern District Court of Manhattan is Wall Street’s court where Elliot Associates are suing Argentina.

However, it is one thing to win it is another to enforce. Elliot had found the means of suing, but for enforcement they needed Pari Passu.

They have used it before and it is what Judge Griesa has used to clobber Argentina. It is simple really. Pari Passu says all creditors owed by Argentina must be treated equally. Argentina cannot chose to pay some and not others. It cannot play favourites. Which is lovely. To which Argentina replied – yes but what makes you think a US court in Manahattan has any jurisdiction over Argentina?

As the Economy Minister, Hernan Lorenzin put it,

“To pay the vultures is not only unfair but illegal in terms of our internal rules,”

To which the Argentine President Cristina Fernandez added that her country would not pay

 “one dollar to the vulture funds”

And now we come to the rub of Judge Griesa’s ruling. He has said the obligation to treat all creditors as equal – pari passu – applies not just to Argentina but also to any agents working for Argentina. By which he means the banks who handle Argentina’s money and make its payments.

When a nation pays its creditors, the creditors don’t call round to Buenos Aires with a suit case. They go to whichever global bank is Argentina’s paying agent. Argentina’s is Bank New York Mellon. BNY Mellon is perhaps the largest paying agent bank in the world. It handles trillions of dollars in payments.

Judge Griesa’s ruling says BNY Mellon must also treat all Argentina’s creditors equally or the bank will run foul of his ruling. In other words though the court cannot get at Argentina directly, it can enforce its ruling upon Argentina’s bank. The court ruling prevents the bank from paying those creditors that have settled with Argentina unless it also pays the vulture fund. And moreover the bank must pay the Vulture funds the whole amount. If they don’t then it is the bank which will find its assets seized and actions taken against it. Thus the bank will have to do nothing.

Is this Pari Passu? Well certainly not as it was originally intended. The judgement in fact jeopardizes anyone getting paid at all. If Argentina tries to pay anyone through BNY Mellon it must pay them all. If it doesn’t want to pay the vulture fund the full amount demanded by Mr Singer then BNY  Mellon cannot pay anyone. If it does, obeying Argentina’s instructions over the ruling of the court, then BNY Mellon will suffer. So BNY Mellon will not release any of Argentina’s money to pay any creditors. In which case the ruling will force Argentina to default again. This will punish the other bond holders. Thus the judgement is not very Pari passu at all. In fact it is a ruling specifically favouring the rights and welfare of Elliot Associates OVER the rights and welfare of all other bond holders. Which is what their lawyers argued in court,

“It is far beyond the bounds of equity to seek to enforce the rights of one litigant by jeopardizing the rights of others,” lawyers representing a group of bondholders who participated in the exchange, led by Gramercy Funds Management LLC.

So although the Elliot case is often written of in terms of Argentina having to pay its debts, it is worth being clear that Judge Griesa’s judgement is not on behalf of the orignial bond holders. It is not seeking to redress any wrong done to them at all. In fact it is a judgement against them as much as it is againt the people of Argentina. This judgement is purely and soley for Elliot Associates, its owners and its wealthy investors. The ruling says Argentina MUST pay Elliot Associates what Elliot wants, which is FULL payment. It is a judgement which says it is an American court in Manhattan which decides who the people of Argentina must pay and how much not their own government.  The judgement punishes everyone except Elliot. It is a judgement for their benefit only. And that, in my opinion, is the essence of what a Vulture fund is about.

Thus this is not about Pari Passu, nor the sanctity of contracts, it is about enriching Elliot Associates. The long term effect will be to make bond holders afraid to settle with a defaulter for fear that a vulture fund will come in later and force themselves to the front of the queue for payment. This judgement seeks to close down the world of compromise, of bankruptcy protection, of helping a bankrupt emerge as a going concern and force us all to live in a new, Vulture World.

I think Pari passu even if it is declared to work as a ‘narrow’ legal argument fails as a broader moral one. And moreover let’s go back for a moment to the idea that debt and its treatment is a social construction not a law of nature. Who does it really benefit to allow nations to be sued?  The people? No. The other creditors? No. Is it even consistent to afford private debtors a form of ‘Chapter 11’ type bankruptcy protection and the chance to emerge as a ‘going’ concern but not to allow anything of the like for nations and their people? No. And does allowing nations to be sued by private entities, push us towards a world of mutual understanding and positive compromises? No. It pushes us towards the  Vulture World at whose threshold we already stand.

We should not allow nations to be sued. Such a simple decision would rid the world of Vulture Funds and close at least this one path to the world of vulture morality. It would also restore the incentive for bankers to alloy their greed for profits with a need for prudence – in this one area at least.

And that is sub-level Three in which I hope to have offered some answers to how suing nations works, why it works, for whose benefit and to whose detriment. I hope I have also suggested how the narrow legal arguments sit inside a broader moral framework.

The next level down takes us further in to the necessary moral underpinning of how nations treat other nations and how they allow private companies to treat them. For it is my contention that legal arguments such as pari passu, treating people equally, while they can exist in isoaltion, and can be applied arbitrarily, only where it suits and not where it is inconvenient, will end up, in that case, being applied by sheer brute power, and will lose much if not all of their moral authority. They will quickly  cease to have the sway of laws which are seen to be morally right, and become just the law that is there simply to enforce the wishes of the powerful. Or to put it another way, the law will become seen as not the guardian of the weak that speaks truth to power but the paid servant of power who says to it, ‘Yes lord, who shall I crush for you today’.

In sub level four we leave NY and its courts but bring in Ecuador and Big Oil to play along with Argentina.

Argentina told to pay hedge funds $1.3bn

Was the headline in the FT on Thursday 22nd November 2012.

The judge who made the ruling, Thomas Griesa, said “After 10 years of litigation this is a just result.”

I’m not so sure. In my opinion the headline and the ruling it reports are just the tip of a shit-berg. Like all bergs the fatal mistake is to think the bit you can see above the water is all there is. In my opinion if you look beneath the surface, almost everything which this article and the case it reports on claim to show, is turned on its head.

The visible tip

Argentina borrowed money, got in to trouble and defaulted on its creditors. What could be simpler? That was back in 2001. Since then the bond holders, or some of them at least, have pursued Argentina through their home courts in America and a judge sitting in Manhattan’s Southern District Court  has finally ruled in their favour. Justice at last for the bond holders. The rule of law, majestic, like a shining island of ice.

Now lets take a peek beneath the waterline.

Sub-level One – Vulture Funds

The Bond holders described rather coyly in the article as an ‘Hedge Fund’are not just any old hedge fund and are not in fact one of the original bond holders who lent the money to Argentina in the first place. The hedge fund in question is what is commonly known as a vulture fund. Vulture funds like most parasites have a very specific niche. Vulture funds go around buying up what is often called distressed debt. Which in their case means bonds which have been or are thought very likely to be defaulted on. Why would they do such a thing? Well the original bond holders, faced with default, will either settle with the defaulter to get back some portion of what they lent – in this case they settled with Argentina for 30 cents on the dollar  – or if a circling vulture fund settles next to them they may sell to them instead. The Vulture funds will say – ‘You never know how much Argentina will offer you but we will offer this much to you  right now’. The original bond holders generally want as clean an out as they can. They will have lost money but that is the the nature of lending it is it not? You win some you lose others. Exactly like lending on a mortgage or buying stocks and shares – the value of your investment can go down as well as up. You pays your money in the hopes of a reward and accept that there is an accompanying risk.

I do not mean to make light of bond holders losing their money, nor imply that a country defaulting is a mere bagatelle. I want only  to remind that lending is always a risk – an accepted and normal risk – which is part of what the interest on a loan is for. Potential default is part of the risk that is priced in to the bonds as we hear every day when we are told of a county’s borrowing costs going up.

So back to the vulture fund. In this case called Elliot Associates. To be more precise, for the happiness of the corporate PR men reading, the  case concerns NML Capital ( A Cayman Island registered fund) which is part of Elliot Capital Management which is part of Elliot Associates. Elliot Associates and its subsidiaries together make up one of, if not the, biggest vulture fund. It is certainly the most aggressive. It is based in New York and its founder and CEO is Mr Paul Singer. I do not know Mr Singer. He may be a wonderful person. But it is my opinion, that if there is something more repulsive than a scaly necked corpse-eater spattered with the gore of some unfortunate beast – if there is something more repulsive – it is what Mr Singer’s business does. Vulture funds Buy to Sue. They feed upon misery for their profit.

Vulture funds do not buy bonds as a form of lending. They do not lend. They are not there to help. They wait until a country is on its knees,  buy its bonds while they are cheap and then use the law to insist, that in its moment of pain and misery, the government, instead of using whatever it has left to get its house in order and help its citizens, must instead pay the Vulture fund, its owners and its investors.

Now supporters will say – but it is the law. The country owes and must pay. What then is the difference between this icy attitude and the cold heartlessness which put families out in to the cold and children to the Workhouse? Debtors prisons and work-house morality. The morality of fat men and their lawyers lecturing the poor and the huddled who owe them money.

Histrionic nonsense! What about the rule of law?  We are not cruel men nor heartless, but we  insist the law be observed. Yes indeed.  The law. Before which all men, all nations must be equal. Is that it?  Yes! Yes!  And what of probity and taking responsibility for ones mistakes and paying for them?

Sub Level Two – How Argentina came to default

Every level is larger than the one above it. It is 1976. Isabel Perón is gone, the military dictatorship led by General Jorge Rafael Videla, Admiral Emilio Eduardo Massera and Brigadier-General Orlando Ramón Agosti now rule.  (All the following quotes are from a very good piece from the Argentina Independent which was founded and is staffed by British journalists. You can read about it here)

On 2nd April 1976, just over a week after the military coup, newly appointed economy minister José Martínez de Hoz, launched a deep restructuring of the economy, based on the principles of neo-liberalism. In his landmark speech that day, he announced a fundamental move “from stifling state intervention to make way for the liberalisation of productive forces.”

In a short space of time, wages were frozen and new labour laws (in favour of companies) were introduced, the banking sector was deregulated, and obstacles to international trade and investment flows were eliminated.

The Neo-liberal experiment had begun. For those close to the military junta, for the corporations and the already wealthy it was the time of what became called plata dulce (Sweet money). The deregulated banks opened up to cheap money and international funding. Sound familiar? But not all boats were lifted.

Just one year into the dictatorship, acclaimed writer and journalist Rodolfo Walsh wrote in his famous open letter to the military junta: “the economic policy of this government, rather than a justification for its crimes, is a greater atrocity that punishes millions of human lives with its planned misery.”

While the few prospered, real wages for the many were crushed by 40%. Child mortality and poverty rose.  Did it stop the ideologues of the free market? Of course not. Mammon is Great! Mammon the all merciful. When did fundamentalists ever pay attention to the real world sufferings of those they disdain? Turban or T-bill, fundamentalists are always certain. Certain that they deserve all they have and so do you.

Like virtually all those free-marketeers who came after them in Washington and in every nation where they were installed they talked about shrinking the state but didn’t. The Generals spent. Their bankers approved. In 1976 before the military and their neo-liberal experts took over, Argentina’s external debt was $8 billion. After 7 years of their financial prudence and free-market can-do the debt was $43 billion. And not a socialist to  in sight to blame it upon.

Not that it dented the zeal of those latter-day crusaders for Mammon and money – the IMF. With Argentina now in serious debt and poverty and inequality rising it was time for the IMF to insist on its special medicine – of more ‘market liberalization’ and more austerity to pay for it. Naomi Klein has written brilliantly about the wider, shameful and wicked experiment in her book The Shock Doctrine.

By 1991 the free-marketeers had been forced to dispense with their dictator. But all was not lost. Argentina’s debt had swollen like a boil to $61 billion which was earning $ 3 billion a year in interest for those who had advised them and lent to them.  And better yet. this time the Argentine people voted the right way, and when Domingo Cavallo was appointed minister of Finance he embraced the free-market, neo-liberal ‘Washington concensus’ with all his stony heart. He was after all a former World Bank President. He was one of us. Not one of those left leaning radicals.  No need for regime change in Argentina. Not this time. That would come later, in another country that had something Washington and the West wanted.

Cavallo embarked on more liberlization, more deregulation and more privatizations. The result was economic contraction. The IMF and the bankers offered more loans and ‘helped’ with more selling of state assets. Argentina sold off one of its crown jewels, its oil company, YPF (remember the name)  at prices critics cried were corruptly low and seemed bidderless, gifts to the powerful and connected. But it was a ‘concensus’ right? It was the 90’s when ‘the smartest men in the room’ were just rolling up their power-dressing sleeves and inventing all the insanely wonderfulf financial things that we have learned about since 2008.

By 1996 Argentina’s debt had now nearly doubled to $110 billion. Cavallo resigned amidst widespread claims of corruption throughout President Menem’s government. But Menem held on for three more years in which another $35 Billion debt was added. No one was to worry though. The IMF had a plan and as long as Argentina continued to follow it, the IMF would smile upon her leaders as would the banks who were getting so very rich from all the interest.

1999 Menem fell.  Fernando De la Rúa took over. But the real power, behind the presidential throne did not blink or close its eyes. Not for a second. Greed and evil don’t sleep. After nearly three decades of neo-liberal policies, away from the golden lives of the urban elite, of Polo matches and private banking, there was no better future coming for the mass of Argentinians, there was recession. But Argentina had become used to turning whatever trick her pimps told her to. So when the IMF said the answer was another loan the new President, much like the old one, got to his knees to give special thanks.

In December 2000 he wiped his mouth clean and addressed the nation.

“[the IMF credit line] is a guaranteed fund so large [$40 billion] that it clears any doubts or threats over Argentina’s future…Argentina has no more risk,

And now it is Greece which will have ‘no more risk’ just like Ireland or Portugal, as long as she can have a big enough hit of that crystalmeth bail out goodness. Now it is Greece that must do what it is told for another tranch of funding Just one more bail out and one more round of austerity to pay for it and Greece, like Aregentina who blazed down this the path before it, will be fine.

‘Greece will not need another bail out’. Of course not. ‘Spain isn’t Greece’. And Spain’s banks are secure and funded and their debts are under control. And Italy isn’t Spain and France isn’t Spain and no one wants to be reminded of Argentina. After all that was then and this is now and now is different. Isn’t it?

Argentina is safe and transparent, and can now grow in peace…2001 will be a big year for Argentina”.

And it was. Argentina continued to follown the IMF dictats of government spending cut backs and austerity. But the country’s economic decline and contraction accelerated. De la Rúa lost control.

Cavallo was brought back, this time with extraordinary powers to force through whatever the IMF said.

A patchwork collection of new taxes, spending caps, debt swaps, and cutbacks (including a 13% in pensions and some social payments) only deepened the country’s social problems and turned more people against the De la Rúa government.

September 2001 another $8 billion loan brought Argentina’s debt to somewhere around $193 billion. And then on December 5th 2001 the music stopped. The IMF felt it had done enough to help the ungrateful and said ‘no’. Argentina defaulted. And the bond holders were, as they are now, outraged.

The echoes of history are, to me, chilling. And I wonder can we really be the only ones who hear them? I cannot believe that those echoes do not whisper through the marbled walls of the Central banks and along the carpeted corridors of the IMF. And yet the lunacy and greed roles on from country to country, from people to people. Always the same true believers burning our hopes, blighting our lives, before they walk away, with a shake of their perfectly tanned heads, to their private jets to return to the place where there is no want and despair does not go.

This is the story of Argentina’s default, so crisply summarized by Judge Griesa in his judgement, when he wrote that, “at long last…Argentina must pay the debts which it owes.”

Sorry to break here, given that most of this has been background, but I have been working more slowly than I had hoped I would.  Part two, in which I hope to get to my conclusions, begins –

Sub -level Three. Vulture world

Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.

First, €30bn is a joke because it is not enough and the Spanish central bank and the government know it.

Second, 30bn of what? The Spanish banks don’t have 30bn of anything worth setting aside.

According to a Bank of Spain presentation quoted in an article by Bloomberg, the bad  debt provisions of  Spanish banks so far

would cover losses of between 53 percent and 80 percent on loans for land, housing under construction and finished developments.

The additional €30B announced today

 would increase coverage to 56 percent of such loans,..

The tiny little problem here, as Bloomberg points out, is that this additional sum is still ONLY for covering losses on land construction and finished developments.  Which means even this ‘new’ rescue, like those before it, has no provision in it ,

… to absorb losses on 650 billion euros of home mortgages held by Spanish banks or 800 billion euros of company loans.

That’s €1.4  trillion in residential mortgages and business loans for which the Spanish banks have made….no provision.

Now it is true that default rates have been lower in Spain than in Ireland for example. But while Ireland has unemployment of about 14% Spain’s unemployment is 24%. Very nearly 1 in every four of the workforce has no official job. Even if they are working in the black economy that still leaves the state with a vast shortfall in tax revenue. No matter which way you look at it it is impossible that Spain’s Caja’s are not going to find huge ‘suprise’ losses on their residential and business loans. Of course those losses are already there but being held off the books with central bank complicity. Why else would the central bank and government simply not make provision for such losses unless they knew they were hidden? The problem is how much longer they can be hidden.

Taking the  likely losses on those residential and business loans in to account,

…banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group.

I take that estimate with a pinch of salt because, although I do not know the Centre for European Policy Studies, it does look to me, to be fairly mainstream if not right wing. Even so I think the figures are clear that Spain’s latest bail out of its banking system is as doomed to failure as those which preceded it.

Then there is the second and more fundamental problem which is that the  Spanish banks simply don’t have €30B they can set aside as further provision for bad loans. How can I make such a stark claim? Actually its not hard.  And this is why.

This chart from Reuters shows that Spanish debt – you remember those successful bond auctions – was NOT bought by the bond market at large (non-resident holders), it was bought by Spanish banks (domestic holders). Similarly Italian debt has been bought by Italian banks.

According to data from the Spanish Treasury quoted by another Bloomberg article, in just December 2011 and January 2012 alone Spanish banks and other domestic lenders increased their holdings of Spanish debt by 26% to €220. Which means they bought over €40 billion. So exactly how successful were those Spanish debt auctions?

Similarly Italian banks increased their holdings of Italian debt by 31% to a massive €267B in the three months ending in Feb. 2012.

The graphs make it starkly clear that neither Spain nor Italy has had any truly  successful bond auctions in some time. What they have had is a suicide pact with their own insolvent banks.

Spain and Italy have desperately needed to claim that they were not locked out of the bond markets and could fund their borrowing. At the same time the largely insolvent private banks desperately needed cash and capital. Cash for day to day running and capital to meet minimum capital adequacy rules. Which just means the base of capital upon which their massive loans sit.

The solution was called the ECB’s LTRO (The Long Term Refinancing Operation), the brain child of the ECB’s new President, Mr Draghi. The LTRO was another means for the banks to borrow from the ECB but it was also intended as a back door way of the ECB bailing out the Soveriegn nations, via their banks. This was a major departure for the ECB. The banks asked for loans which the ECB granted at a nominal 1%. To give you some notion of the size of the operation to keep Europe’s banks in business, banks in Italy, Spain, Portugal, Ireland and Greece  between them borrowed 489 billion euros on Dec. 21 2011 and 530 billion euros on Feb. 29. 2012. A trillion so far. I say so far because there is every reason to suppose the ECB will decide the only way to avoid a collapse in the banks they seem determined to keep from their maker is to pump yet more money in to them (LTRO3).

The banks that took the money then used it to do several things. First and foremost they bought sovereign debt as per the plan. That way the sovereigns could claim all was well with them and the ECB could claim it was not bailing them out (not directly at least). { In the original I got the explanation of how the ECB bailed out the naitons via the LTRO exactly arse backwards. I wrote that the ECB was not supposed to bail out banks which is completely wrong. It is the nations the ECB should not bail out directly. The ECB and the Nations used the LTRO as the means of getting round this. My sincere apologies for getting this so wrong. It did not, however, affect the point of the piece.} After all they could show suprisingly ‘buoyant demand’ for their debt/bond auctions, which rather marvelously kept down the interest they had to offer. The result was that the private banks were then in possession of sovereign debt that would have paid them between 5-6%. So, money they borrowed at 1%, bought bonds that paid them 5%. That is a straight bail out from the sovereign’s tax payers of 4%.

Think about it. The sovereigns could have gone to the ECB themselves and borrowed money themselves from the ECB for 1%. Instead the sovereigns let the private banks borrow from the ECB at 1% and then the sovereign borrowed from the private banks (remember when a sovereign sells bonds/debt the buyers of that debt are lending to the sovereign) at 5%-6%.  Why? Answer – so they could say, ‘We’re not having to get bailed out by the ECB. No, we are selling our debt successfully to the market, who love us.’ It was a lie but it made it sound as if the ‘reovery plan’ and the unpopular austerity policies must be working. And at the same time it allowed the sovereigns to bail out the private banks without having to tell the people they were doing so. Two lies for the price of one.

If we now take stock for a moment of who ended up with what, the picture becomes rather ugly. The insolvent private banks pretend to be solvent, but in fact what they have is a vault full of IOUs/bonds from their nations. The Nations claim to be selling their debt but have in fact sold it only as far as down the road into banks who are only alive at all because they are being bailed out.

And what of the ECB? Well former ECB board member Juergen Stark said recently in an interview with the German newspaper, Frankfurter Allgemeine that,

 …the balance sheet of the euro system, isn’t only gigantic in size but also shocking in quality.

The ‘shocking’ quality of the assets is because the ‘assets’ in question are the bad loans that Europe’s private banks couldn’t get anyone else in the whole wide world to accept as collateral. EVery tie the ECB bails teh banks out, each time it ‘extends loans’ it has  to acceot as collateral for those loans  whatever the banks have left. Which means the ‘assets’ that the ECB wouldn’t accept last time.

All that has happened is that an elaborate debt laundering two-step has been put in place so that banks can be bailed out by nations who can be bailed out by the ECB. But it is done in such a duplicitous way that the banks appear to be merely getting a loan, the nations appear to be selling their debt as per normal and the Tax payer, who is actually footing the bill for both, is completely in the dark about the whole thing. THAT is the ECB and our European rulers in action. Feel shafted and lied to? You should.

Now however, the lie is unravelling. You see the key is that the private banks’ bad assets, those that no one believes have any real worth, are taken out of the private banks and ‘pledged as collateral’ at the ECB who in return give them loans. The ECB of course reveals no details so no one can prove a thing. The private banks then use then loans they got from the ECB buy sovereign debt with that money. (Some, the really terminal, also use it for repo in order to keep breathing day to day). The result of this gyration, from the point of view of the private banks, is to replace worthless their assets with one’s that are backed up by the sovereign nation. The ratings agencies will then look at those assets and say – this is proof of how much support the sovereign is willing to give to their banking system. They call this ‘sovereign uplift’ and add this as a positive factor in establishing the solvency and credit worthiness of the private banks. And of course the sovereigns are also being helped by the banks who are buying their debt.

In a sense the idea is to get two cripples to lean on each other. As long as the two cripples stay very still you can see them as propping each other up. But if ever one or, heaven forbid, both start to wobble then the previously positive relationship suddenly looks very negative. Instead of propping each other up they look as if they are pulling each other down. And that is where we are now. If the banks look like falling over the sovereign will be left with a massive collapse which it will, as with Spain’s recent nationalization of Bankia, try to foot the bill for. That will hugely increase sovereign debt. But who will they sell their debt to now? Even the banks who haven’t yet collapsed are badly affected because they and their ratings rely on the perceived ability of their sovereign to support them. Which becomes more and more questionable with every bank that the sovereign has to save. As the sovereign is seen as more and more vulnerable , with larger and larger debt which it seems less and less likely to be able to sell, then the banks who have bought all their sovereign’s debts are perceived as potentially being back where they started – with a vault full of dubious IOUs.

If it all seems head spinningly circular, that is because it is. It is a cycle of lies and debt  re-branding. As long as the momentum of the lie and of public belief is in the ‘forward’ direction then all seems to be well. Everyone is selling their debt, no one is being bailed out and no one is aware of who is paying. But if the lie and the momentum of belief goes into reverse then all the players start to look more not less vulnerable and at risk.

What has happened in the last week with the election in Greece and the unravelling of the lies and hidden bank insolvency in Spain, is that the momentum of the grand lie has started to reverse. If that reversal is not halted and the truth not quarantined  then I believe there will be a another clamour raised by Europe’s insolvent banks for the  ECB to announce yet another emergency funding programme.

The fog of burning acidic financial lies that have been rained down on us for  four solid years is finally meeting political reality and opposition. Suffering can be ignored and met with the police baton but it cannot be erased forever. We have yet to see what if anything M. Hollande will do in France  and what will happen in Greece and in Spain. But the momentum of their lies is, for now at least, running against our oppressors.

Which as the article goes on to suggest, averts bond disaster and lowers the pressure on Portugal.  I see this as the now customary Pravda style “all news must be good news”.

What the facts tell us is somewhat less glorious.  There was demand for the debt so that Portugal did sell the whole amount.  What we don’t know is how much of that demand was actually the ECB or proxy buyers for the ECB.  We can be fairly confident quite a lot was bought by the ECB on the grounds that the ECB has stepped up its buying of European national debt specifically to avoid a no bid and the subsequent panic in the market.

Once we factor in the ECB we can no longer say there was any great demand for Portugal’s debt.  If there had been ‘real’ demand and not the fake demand of the ECB, then we would have seen the yield and coupon (measures of the rate Portugal will pay for this borrowing) drop. We did not see any great drop.  Despite  ECB intervention the yield only edged down from 6.8 in November to 6.7 % now.  That is a pathetic 0,1% drop.  What it tells me is that despite the efforts of the ECB, the other bond buyers were not impressed or fooled and would not buy unless at very nearly the same rate as before.

You could say well at least the rate didn’t go up. Yes.  The ECB achieved that.  But a rate of 6.7% is till unsustainable for Portugal because it will not earn anything like that rate with the money it has borrowed. Portugal’s growth will be far, far below 6.7%.  So Portugal will be paying out far more than it is earning. I.E. they will continue on their way, now a crowded way full of Greeks and Irishmen, on their way to insolvency.

The worse part of the auction news for Portugal was what  happened to the rate on its shorter term debt.  The rate on its five year debt jumped up from 4% last October to 5.396% today.  That is a hefty increase in borrowing costs. It seem obvious to me that the ECB was buying the 10 year and left the 5 year to fend for itself.  To my mind that means the 5 year is a better, less manipulated view of the real state of Portugal’s situation.  And it’s not good. An increase of 1.4% in just three months is very bad indeed.  Think of what such a rate increase would do to your mortgage payments.

So where the ECB stepped in, the rate dropped 0.1%  Where it did not, the rate shot up 1.4%. The jump up was 14 times larger than the drop down.

Pravda reports another glorious victory for our invincible leaders. I say another division was decimated.  You choose.