Page 2 of 2 Ask not for whom the bells toll By Chan Akya
remove foreign investor interest in Russia, creating noxious conditions for its
top companies in tapping overseas debt or equity investors. As collateral
damage, many Russian oligarchs have seen their net worth vanish overnight as
the impact of falling share prices in Russia hurt their borrowings, in turn
forcing many of them to pull out their most liquid assets.
Since many Russian oligarchs had a second home in the UK, the net result has
been withdrawal of savings from UK banks as well as significant selling
pressure on expensive English homes, both of which have served to exacerbate
the crisis being faced by
Britain. This has pushed confidence in the UK to a recent if not all-time low;
with the currency and its stock markets tanking, there doesn't seem to be
anything that the socialist government in the UK can do except perhaps inflict
more damage.
Other countries in Europe, including Switzerland, Ireland, Italy and the
Netherlands, are facing the collapse of both their banking sectors and large
swathes of their corporate sector to boot; making state aid all but impossible
to deliver given the scale of the economic calamity.
In the second category, namely "won't pay", the principal defaulter is Russia
but loosening up the definition would ensnare other countries including France.
In the case of Russia, the country has unilaterally decided to back certain
national champions while letting others fail on their international debt
obligations. The scale of government involvement in the debt market problems
suggests that it is not entirely up to the individual corporate to decide on
repaying its foreign creditors; being reclassified as a lower-priority industry
automatically means the company is effectively expected to secure a
restructuring on its foreign debt that would allow precious foreign exchange to
be used instead to repay the obligations of those closer to the Kremlin.
Why France? Typically in a debt restructuring, creditors would gain control of
the company and decide on selling assets as merits their intentions to get the
maximum repayment. This is, however, difficult to achieve in France, where
archaic corporate laws and frequent government intervention mean that the
ability of a foreign creditor to enforce collateral pledges remains
questionable.
Into this group we must also add countries that are sorely tempted to go back
to their socialist roots, ignoring the gains made by opening up to
globalization. This motley crew of countries could range from the Balkans to
the Baltic States, and within their ambit include various trouble-prone
countries (at least politically) such as Greece and Poland. All of these
countries can summarily change the nature of their statutes, the pledges made
with institutions in the European Union for some and the International Monetary
Fund for others. That they are currently rich and want to stay that way would
be the only plausible explanation for their actions.
The other common thread uniting these countries is ideological disdain for free
markets, as shown by both Putin and French President Nikolas Sarkozy in their
criticism of laissez-faire. As all good communists do, these leaders have
confused cause with effect in order to build up a self-serving system of
patronage in their backyards.
The consequences for Russia are easy to arrive at, namely mounting
unemployment, bread and meat queues and increased repression of its people. As
for countries like France, the consequences will be a significant spike in
unemployment, higher taxes that push out its best brains and entrepreneurs,
reduced efficiency and a long-lasting recession. So, no change there.
The last category of "both" is occupied by a heavyweight. This is the country
that has more debt than any other, a dysfunctional banking system, a regime
change underway, millions of unemployed people, thousands of bust companies and
dozens of scam artists. The Land of the Free is now the land of a thousand
scams, where everything from the currency to bonds and stocks is mispriced.
Yes ladies and gentlemen, the one country where you have no hope whatsoever of
recovering your debt as measured by its current purchasing power is the United
States of America. For this is a country that has no source of refinancing
except for fresh debt issuance, no industry that it could excel in to generate
profits that could prove a succor in the recession and certainly not a lot of
confidence-inspiring institutions or even people. Whether it is the parallels
to Lehman Brothers or Bernie Madoff, the story for the US is the same - all the
world's smoke and its mirrors cannot conjure up the actual cash flow required
for the US to repay its creditors.
The first actions of president-elect Barack Obama have been deeply
disappointing, if setting off a dozen alarm bells. Be it the Keynesian spending
package announced to build bridges to nowhere (see
Honey, I switched the medication, Asia Times Online, December 13, 2008)
or the much-vaunted rescue of the automakers that were signed off by President
George W Bush apparently with the support of the Obama team, the move towards
socialism is unmistakable.
Rather than being a dogmatic gag reflex, my objections are based on cold
numbers: reduced corporate efficiency in the United States means there will be
a longer recession with more protracted job losses. The destruction of the
middle class in the country also means a surge in poverty across the developed
world, as purchases of discretionary items and vacations fall off a cliff.
The government is able to finance these expeditions because the rest of the
world, including the incredibly dense Asian central bankers, continue to buy
into the age-old malarkey of risk-free rates and the US dollar as the reserve
currency. An objective longer-term look at the US suggests that the country's
decline is permanent, not cyclical; accelerated as it is by the declining
demographic profile.
It took millions of new immigrants from Europe and a world war to pull the US
out of its first Great Depression; I shudder to even consider what it would
take for the country to get out of this one.
An anecdote related by a corporate leader about the dysfunctional company he
joined tells the tale of an "offsite" meeting held in a beach house in
California. Feeling the building shudder in the middle of a presentation,
everyone in the room screams "earthquake" and starts running out of the house
to the beach. As they gather their wits on the waterline, one bright spark
points out that if the earthquake had its epicenter underwater, there would
soon be a tsunami, which made standing on the beach rather dangerous. So
everyone starts running back to the house, now seen as safe.
I leave it to my diligent readers to figure out whether emerging markets are
the house or the beach and whether the epicenter of the earthquake now roiling
global markets was underwater or subterranean. The point I am making, though
independent of all that, is to question whether today's so-called safe havens
merit that badge in any way, shape or form.
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