A sensible plan

From Business Recorder:

The euro zone may be starting to get to grips with the Greek crisis. The idea of bond buybacks by the European bailout fund is back on the table. The European Financial Stability Facility could lend to Greece to buy its own debt back… The idea isn’t entirely new: it was mooted last year before being shouted down by Germany, which saw the plan as a backdoor way of making other countries take on Greek debt…

A buyback could genuinely bring down Greece’s debt. It could be done in conjunction with lower interest rates on Greece’s bailout loans, and some form of extension of bond maturities. This three-way formula could pave the way for compromise between the ECB and euro governments.

Greek debt is trading, on average, at about 55 cents on the euro. A buyback of all the country’s debt at that price would cut the country’s debt load to 87 percent of GDP, lower than Portugal or Ireland.

I have been told that it is considered very ungentlemanly for a country to buy back its own debt at a discount to face value, but needs must.

To do it properly would require a lot of connivance and cloak and dagger stuff and saying one thing and doing another (in which Greece are past masters). Ideally what Greece would do is openly go out an borrow another €175 billion from the ECB or IMF (or whomever), pushing its nominal debt-to-GDP to something silly like 250% of annual GDP. While ostensibly pissing this money up the wall, as per usual, they would actually squirrel it away somewhere safe.

Let’s assume the market value of the old outstanding debts falls even further to half its nominal value of €350 billion. Greece would then, very carefully and using lots of nominees, buy up all the outstanding debt which comes on the market, taking care not to push up the price again. It can easily keep the market value down by publishing horrendously bad figures for unemployment, deficits, fall in GDP, allowing a couple of its banks to go bankrupt and so on.

Once it has bought back most of its old bonds, it can merrily shred and burn them, hey presto, old debts exitinguished and it now only owes the €175 billion figure mentioned above.

Reader’s Letter Of The Day

From yesterday’s FT:

Sir, In Screws’ death is final shock horror story (July 8), Matthew Engel states that the News of the World has been walking the fine line between half-truth and lies for 168 years.

That is indeed an acute observation and characterises accurately the kind of reporting employed by the tabloid press when it comes to the European Union. For far too long tabloid papers have been allowed to misreport the EU and the effect of its policies. Newspaper owners and editors, for their own reasons, have gone on misinforming the public with headlines full of myths and sometimes outright lies.

In some cases they have gone as far as to influence government attitudes towards the EU, and the admission from the UK prime minister and the leader of the opposition of the extent to which some papers were allowed to have a stronghold on political classes speaks volumes.

For that reason it is paramount that the inquiry into press industry standards looks, among other things, at the way the press reports on something as important as the UK’s membership of the EU. If we are to clean the press in Britain we may as well rid it of its obsession for euromyths.

Petros Fassoulas, European Movement, London EC1, UK.

Tabloid refers to the paper size, so strictly speaking all English newspapers are now tabloids, except the Telegraph and the FT (IIRC).

Anyway, I quite agree with him, if all newspapers reported accurately what the EU was really like, we’d be out by the end of the year, whether the politicians wish us to stay in or not.* Of course there are good things about the EU, but if it’s 20% good and 80% bad, and we can keep most of the good bits and avoid nearly all the bad bits by leaving (at the small cost of the French trying to impose a few new bad bits on us), well what’s the problem?

* The Ian B theory is that UK politicians in general and Whitehall civil servants in particular absolutely love the UK being a member state of the EU, because they can use the EU as a Trojan horse to impose their own ‘vision’ on the great British public using the excuse that it’s all about EU harmonisation. He’s quite possibly correct, but that’s still an argument for leaving, isn’t it? As he points out himself, we’d be doing all the other member states a huge favour into the bargain. Win-win!

On the infinite stupidity of European Parliament

From Europolitics:

The European Parliament is attempting to rid the EU of speculators betting on Greece going bankrupt, voting for a ban on the practice of naked short-selling of credit default swaps… CDSs are insurance-like contracts that pay the buyer if a country or company goes bust.

OK.

Buying a CDS is analogous to buying insurance.

If you own a house, you are “long” of a house and you can insure it against the risk of it burning down. The insurance company doesn’t own your house (the bank does, probably). It is gambling on your house not burning down (or fewer houses burning down).

If you own Greek bonds, you are “long” of Greek bonds. You can insure against default by buying a CDS. The seller of the CDS doesn’t own Greek bonds, and is gambling on Greece not defaulting.

The owner buys insurance, the insurance company sells insurance. You buy a CDS, the insurer sells a CDS.

If you own Greek bonds and buy a CDS, your risk is ‘covered’ and you are now indifferent whether Greece defaults. The insurance company has sold you a “naked” CDS and has every interest in Greece not defaulting.

The general rule in insurance (apart from life insurance) is that you can only insure something up to the lower of its value or replacement cost; if you over-insure, you have every incentive to burn down your own house and pocket the difference.

Now imagine, I could buy “naked” insurance, i.e. I don’t own Greek bonds (or your house) – then I have every incentive to trigger a Greek default (or to burn down your house). And as we know, setting fire to a house is easier than preventing other people from doing so – there is assymetry of risk here.

So it’s the BUYERS of “naked” CDSs who cause the problem (to the extent that there is one) and not the SELLERS – all insurers are by definition “naked” sellers. Greece (or its new rulers, the EU) ought to be rejoicing every time a major financial institution sells naked CDSs because this institution has just put itself in to bat for Greece.

Here endeth.

Yes, I know it’s been done before…

Compare and contrast the top and bottom headlines on this screen shot of the BBC’s news front page

Reader’s Letter Of The Day

From today’s FT:

Sir,

Greece can’t be allowed to fail – to save French and German commercial banks. But a failure has to be engineered in a way that saves commercial banks from having to pay out on the credit default swaps insurance for which they have already taken large premiums. Tails really do wag dogs.

Keith Wallace, London EC2, UK .

The Daily Mail outlines the advantages of Land Value Tax

From The Daily Mail (our new weekend paper of choice as it has the best weekly TV guide):

Take a short trip on the metro to [Athens’] cooler northern suburbs, and you will find an enclave of staggering opulence. Here, in the suburb of Kifissia, amid clean, tree-lined streets full of designer boutiques and car showrooms selling luxury marques such as Porsche and Ferrari, live some of the richest men and women in the world…

One of the reasons [the inhabitants] are so rich is that rather than paying millions in tax to the Greek state, as they rightfully should, many of these residents are living entirely tax-free. Along street after street of opulent mansions and villas, surrounded by high walls and with their own pools, most of the millionaires living here are, officially, virtually paupers.

How so? Simple: they are allowed to state their own earnings for tax purposes, figures which are rarely challenged. (1) And rich Greeks take full advantage. Astonishingly, only 5,000 people in a country of 12 million admit to earning more than £90,000 a year — a salary that would not be enough to buy a garden shed in Kifissia… (2)

With Greek President George Papandreou calling for a crackdown on these tax dodgers — who are believed to cost the economy as much as £40bn a year (3) — he is now resorting to bizarre means to identify the cheats. After issuing warnings last year, government officials say he is set to deploy helicopter snoopers, along with scrutiny of Google Earth satellite pictures, to show who has a swimming pool in the northern suburbs — an indicator, officials say, of the owner’s wealth.

Officially, just over 300 Kifissia residents admitted to having a pool. The true figure is believed to be 20,000. There is even a boom in sales of tarpaulins to cover pools and make them invisible to the aerial tax inspectors. (4) ‘The most popular and effective measure used by owners is to camouflage their pool with a khaki military mesh to make it look like natural undergrowth,’ says Vasilis Logothetis, director of a major swimming pool construction company. ‘That way, neither helicopters nor Google Earth can spot them.’(5)

But faced with the threat of a crackdown, money is now pouring out of the country into overseas tax havens such as Liechtenstein, the Bahamas and Cyprus. (6)

1) Yes, getting people to declare their incomes honestly is difficult, and even if they did, a tax on incomes still has huge dead weight costs…

2) … but working out the value of land that people own is relatively simple.

3) The DM confuse ‘cost to the economy’ with ‘the government collecting less in tax than you’d expect’ and use the “s” word, but hey.

4) They haven’t learned the lessons of the Window Tax. It’s entirely unnecessary to know exactly what is built on any plot of land to work out the location value of the land to within a tolerable margin of error (certainly by Greek standards), it doesn’t matter whether an individual house has a swimming pool or not (and if you wish to make swimming pool owners pay more in tax, then it’s easier to slap a tax on mains water usage).

5) Most pictures on Google Earth are several years old, it’s too late to try and camouflage your swimming pool now.

6) So what? A lot of that money will come flowing back to pay the LVT bills, won’t it? And if not, the Greek can recover the tax arrears by selling off the plots of non-payers or renting them out. Which, coincidentally is more or less the opposite of their plan to sell off even more state-owned land.

But no doubt, all these millionaires will manage to track down a Poor Widow or two to use as a human shield: surely it’s far more important to allow them to live out their days in peace than try to plug the budget deficit or anything?

More Banking Blackmail Fun

The Daily Mail merrily repeats a story which is patently untrue:

Britain could be hit with losses of up to £366 billion from the collapse of the Greek economy, it has emerged. Ministers had claimed that British banks have ‘only’ £2.5 billion of exposure to Greek government debt, while the Bank of England says the potential losses would be just £8 billion.

But experts last night said that UK financial institutions are in far more danger than previously thought, because banks are tied up in complicated derivatives and insurance deals. They warned that if Greece defaults on its debts the crisis could cause a series of dominoes to fall, with Portugal, Spain and Ireland heading to the wall in turn…

Ho hum.

The nominal value of all these side bets may well be £336 or £366 billion (the headline and the contents of the article are not consistent), they may well be £3,360 billion or £3,360 quadzillion, but it’s still nothing to worry about. As I’ve said before, beyond a certain level, it’s not proper money any more, it’s just numbers on bits of paper:

1. These banks and financial institutions have all made bets with each other, it is a zero sum game, so even if some banks end up losing a total of £336 billion, other banks will win £336 billion – and I’d assume that most banks have inadvertently made each-way bets because different departments can and do take opposite positions.

2. The total amount that any bank can lose is capped at its total net assets; I guesstimated the total net assets of UK banks (i.e. shares + bonds) at £873 billion last time I looked, so absolute worst case, UK banks have only bet with non-UK banks and they lose every single bet, shareholders and bondholders would lose just under half their capital.

3. Commonsense tells us that if you have assets worth £10,000 and foolishly enter into a £1 million bet which you lose, the maximum you can lose (and the maximum amount which the other person can win) is £10,000, which whittles that £336 billion down even further.

4. Let’s say that Big Bank and Small Bank have entered into such a bet and Big Bank wins – the most extreme outcome is that Small Bank loses everything and, having nothing left to offer, is taken over by Big Bank lock, stock and barrel. So along comes the Monopolies & Mergers Competition and splits them up again, big deal.

Greek bail-out nonsense: suddenly we’re all experts!

The MSM is full of apocalyptic visions of why we are doomed if we bail out Greece again and doomed if we don’t, largely dreamed up by people who have little clue about banking and finance and so on.

As far as I can see, there isn’t much to worry about if we allow Greece to default, leave the Euro-zone etc. History is littered with similar examples, no two cases are ever exactly the same, but as a general rule, the country concerned usually devalues, dusts itself off and is back to normal after a year or two.

A few recent examples are:

1980s Latin American debt crisis
1990 German debt waiver
1992 Black Wednesday
mid-1990s Argentine debt restructuring
1997 Asian financial crisis
1998 Russian Financial Crisis
2008 Icelandic banking collapse (compare the favourable outcome here with the complete and utter mess that the O’Irish made of it).

There have been plenty of instances where a currency has devalued by twenty or thirty per cent in the space of weeks or months (which to a foreign debt holder is tantamount to a twenty or thirty per cent default), sometimes it bounces back, sometimes it doesn’t, sometimes it leads to inflation, sometimes it doesn’t.

Never forget that the sum total of all the money in the world is always precisely zero, because for every financial asset there is a financial liability, and beyond a certain level of abstraction and on supra-national scale, money really just is numbers on bits of paper, it’s not real money any more (as Nick Leeson once said). It’s the pretending that these numbers mean anything which causes the damage.

As a silly example, sometimes a tramp asks you if he can “borrow” a pound; if you hand over a quid and say “Keep the change”, all is well with the world. What would be stupid is taking him at his word and then trying to track him down asking for your money back.

I won’t bore you further with why this is so, but take it from me, it just is.

My Big Fat Greek Finance Minister

Buddy, can you spare me a Euro? Well, about a hundred billion, actually…