The Big Stalemate

Today is the anniversary of the Portuguese revolution, which coincidentally falls on Easter Monday. In Lisbon, a country with no government is negotiating a loan with a troika composed of the IMF, ECB, and European Commission. The left wing parties refuse to be part of the negotiations, so it falls to the parties that will divide power to engage in the discussions.

To suit their own purposes, the socialists forced the government’s collapse when it was clear that aid would need to be requested, so that the fallout from the austerity package would be shared by the whole political spectrum. The left politely bowed out, but that will hardly get them more votes in the June election.

All in all, the Greeks, Irish, and Portuguese owe around 750 billion euros. Some guy on CNBC, who looked as if he was still listening to children’s tales a couple of years back, described them as the three little pigs. The big bad wolf, which anyone here would tell you is called Spain, owes one trillion euros, he pompously announced. If you go back to your childhood, you will recall that each little pig built his house in a different way. As the story ends, the wolf ends up in a boiling pot in the last pig’s hearth.

If you believe in fairy tales, then Portugal would be the only survivor of this sad story, the proud owner of a brick house. And actually it was an overabundance of bricks that got the Spanish big bad wolf in trouble to start with. But this is no children’s story: in practice all these countries will survive. Iberia, Greece, Ireland, and of course Italy, are the heart of European civilization. Collectively, they provide the roots of its literature, administration, naval prowess, contribution to globalization, and much of its best music and poetry. Fairy tales can be misinterpreted.

A representation of the "Unecessary bailout" in an Op-Ed piece in the NYT. Neat, although players of "guitarra portuguesa" very rarely use sheet music. As you might expect, we play by ear.

Regardless whether it is market speculation that’s turning all this into a self-fulfilling prophecy, the fact is that in a country where interest rates on deposit accounts are running at three to four points, government bonds returning 10% per annum seem like an attractive investment to me. 

There are three big players in the ratings game: Moody’s, Fitch, and Standard and Poor. I’ve always been rather perplexed by the name of that last one. All three agencies are American. No European ones exist, at least none that matter.

Whenever a crime occurs, any detective will tell you there are three things to look for: motive, motive, and motive. Sometimes it’s love, sometimes it’s hate. Usually it’s money. Forget “cherchez la femme”, how about “cherchez l’argent”. So how does a rating agency earn its keep? Well, used to be that a potential investor, or a firm seeking to do business with a third party, would request the business credentials of the said party.

Enter a rating agency.

Yes, your money will be safe.
Er…, maybe you should be prudent.
No way, you might as well put it in a bucket and throw it out the window. 

And Mr. Mitch or Mr. Foody would get a nice fat commission for saving the day. But now the lunatics have taken over the asylum. In a scheme not entirely dissimilar to the protection racket, companies regularly pay to be rated, in other words an agency has a clear vested interest in providing a better rating in exchange for cash. So much so that business is allegedly solicited under the reverse condition, i.e. that your company rating is subject to improvement if you pay the rating agency. There is much discussion on the web about the downgrade of Hannover Re by Moody’s, cited as an example of just that kind of conflict of interest.

Just as critical social problems are being created in Portugal that are in good part due to rating issues, so billions were lost in collateralized debt obligations (CDOs) for loan tranches with triple-A ratings, and Enron kept its investment grade rating until four days prior to collapse.  

Recently the dollar has gone crazy-low, a combination of the interest rate pressure from the ECB and the qualms expressed by rating agencies on the quality of U.S. debt. So after flexing their muscles on a few piggies, it’s time to play with the wolves. In Europe, a concerted attack on Spain will seriously challenge the existence of the euro. Even Ms. Merkel’s supporters have understood that this will be bad all round, just as they presumably realized that the Greeks will not be selling any islands in the near future.

To cap it all, Iceland’s population decided to put the cat thoroughly among the pigeons by simply not repaying the money that was committed and subsequently lost by the banks. International courts will be convened. The Icelanders cheered in the streets. How fitting that Iceland is the tip of the iceberg.

In the days after the Portuguese Revolution, the country was in social turmoil. The nation assimilated an extra 10% of its population in a series of airlifts from Angola and Mozambique. Refugees from a colonial war turned civil war, a war that left Angola’s population maimed and crippled. Some of those people, put up in the best tourist hotels west of Lisbon, brought with them the only currency they could secure. Marijuana. In beach cafés, pounds of dope were weighed on scales designed for butter and sugar.

After forty-eight years of fascism, the regime fell. In one year, the population jumped from ten million to eleven. In 2011 there is no sign of ghettos, no one remembers any more who came from where, and the scales are back to weighing butter. These days, organic, of course. On the 25th of April 1974, despite  a fifteen year colonial war on three fronts in Africa, where many died, despite abuses by the secret police for decades, including imprisonment, torture, and execution, no one was killed.

There is no other case in Europe where a country was able to assimilate such violent fractures in such a beautiful way. Not ever. So when the economics and the politics are all talked out, we’ll get to the important bit. The social fabric. It’s what makes credit card companies “restructure” client debt. It’s what made the G7 propose major debt relief for Africa.

When a bank is owed a little money, it’s the client’s problem. When it is owed a lot, it’s the bank’s problem. Maybe that’s why they call it sovereign debt.

The India Road QR links for smartphones: point your camera and click.

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