Latest from David Kotok at Cumberland Advisers <http://www.cumber.com/commentary.aspx?file=031012.asp>-- [14] Chris
Greece, Tragedy & Poetry
March 10, 2012
David Kotok, Chairman & Chief Investment Officer
“PETRUCHIO. Signior Hortensio, ‘twixt such friends as we?Few words suffice; and therefore, if thou know One rich enough to be Petruchio’s wife, As wealth is burden of my wooing dance,?Be she as foul as was Florentius’ love, As old as Sibyl, and as curst and shrewd As Socrates’ Xanthippe or a worse, She moves me not, or not removes, at least, Affection’s edge in me, were she as rough As are the swelling Adriatic seas: I come to wive it wealthily in Padua; If wealthily, then happily in Padua.”
– William Shakespeare, The Taming of the Shrew
Metaphors:
Padua is the center of wealth in money terms, so it equates to the European Central Bank (ECB) under the leadership of Mario Draghi.
Sibyl is the Greek prophetess. In modern times, Sibyl represents the forecasters who have predicted doom, financial contagion, and collapse for the last several years as the Greek debt tragedy unfolded.
Xanthippe was the wife of Socrates. He demonstrated patience with her biting tongue, to his eventual benefit. Modern-day Xanthippes have crowded the media and blogosphere with nastiness. Critical thinking, in accordance with the Socratic method, prevailed for those investors who did not panic but were cool and disciplined.
Florent was a knight who was forced to marry an older and wiser woman. She ultimately saved him. Florentius’ wife is ISDA, the International Swaps and Derivatives Association, who showed their integrity by ruling unanimously (15 voters) that Greece did default and that $3.16bn in credit default swaps (CDS) must be settled.
Petruchio is the suitor motivated by greed. In the end, he learns the value of honor, love, and integrity. Is Petruchio the metaphor for Greek unions and civil servants who have been profligate spenders and who have squandered the benefits of the Eurozone’s convergence and integration? Does their greed culminate in generational poverty for their countrymen? Time will tell.
What may investors learn from the Greek debt tragedy?
Bullets:
1. Do not trust any government. Nothing new here. This Greek government invoked the collective action clause (CAC). It retroactively inserted provisions in a debt contract and then imposed them. No sovereign-debt contract is now immune from the same action. All sovereign-debt contracts will carry a risk premium. Buyers of European sovereign debt now act at their own peril.
2. Central bankers ignore Walter Bagehot when they choose to do so. Whatever happened to lending against “good collateral”? Also, central bankers (ECB) are complicit parties to the establishment of a government class and an “all-other” class when it comes to the security provision in sovereign-debt instruments.
3. Legal jurisdictions are important. The Magna Carta is nearly a millennium old. It divided the Western world into those who are descendants under Roman law and those who are the descendants of English law. Greeks and other Europeans are in the Roman law camp, which empowers the state at the expense of the individual. English law attempts to protect the individual from the state. The tension between these two systems continues to the present day. Notice the different treatment of the majority of debt holders under Greek law vs. the minority of debt holders under non-Greek law. Investors who venture out of English law are invited to take note of the risk.
4. Under non-Greek law, ISDA functioned and did the “right thing.” ISDA validated the insidious nature of the CAC. It also did the only thing it could do. Otherwise, the entire CDS structure would collapse. For the full voting record and determinations under ISDA, see: http://www.isda.org/dc/docs/EMEA_Determinations_Committee_Decision_09032... [15]
Europe’s saga of debt tragedy is not over. Portugal’s spread to German debt is 1200 basis points. In Spain the youth unemployment rate is about 35%. Belgium’s debt/GDP ratio is over 100%. Italy is the world’s third largest debtor; its debt/GDP ratio is 120%. Much of Europe is in recession. And European sovereigns will borrow now with the world knowing what can happen to a debt holder.
At Cumberland, we did not own and we will not own debt where a legal system can rewrite a contract, unless disputes (bankruptcy) can be adjudicated by a neutral court. We avoid debt of government structures that create a two-tiered system of “haves and have nots.” That is why we avoided Fannie Mae preferred.
We still believe in English law and American courts. If we lose those, we are all doomed.
As for the Greeks, they are headed for a period of sleeping on the “bed of straw.” They will have to get used to it. That forecast is not from the words of Xanthippe, nor the words of Sibyl. These are the words of an American poet. Wendell Berry wrote:
“By its own logic, greed
Finally destroys itself,
As Lear’s wicked daughters
learned to their horror, as
we are learning to our own.
What greed builds is built
by destruction of the materials
And lives of which it is built.
Only mourners survive.
This is the ‘creative destruction’
of which learned economists
speak in praise. But what is made
by destruction comes down at last
to a stable floor, a bed
of straw, and for those with sight,
light in darkness.”
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