euro debt crisisAs so often in politics the evenings main even in the ring is a dirty long drawn predictable slug fest with the really interesting match taking place a couple of bouts before the supposed climax.

Apparently the last few days have been about:

TREATY ON STABILITY, COORDINATION AND GOVERNANCE IN THE ECONOMIC AND MONETARY UNION

Where the main points obliging the parties are:

1)      The public deficit and debt is not to exceed:

  1. Deficit 3% of the GDP.
  2. Debt 60% of GDP.
  3. Structural deficit 0.5% of GDP.

2)      A penalty clause in the event of non-compliance of 0.1% of GDP payable to the general EU budget.

3)      The provisions are to be implemented by each signatory under their National Law.

4)      The parties shall report their debt issuing plans ex-ante.

Significantly and predictably enough it is not about the Euro. Countries outside the Euro can apply (sign the dotted line). It is NOT about giving the EU more power (well it is, but…) the legislation is to national, preferably – but not necessarily – constitutional.

The pact is probably – in effect – more restrictive of the European States than the US Constitution is on the states in the USA. Specifically the deficit is addressed, not tax income and public spending separately, as in the USA, where the spending and the taxation and two different things – leaving European observers in great confusion.

But the really interesting point is much underreported – except on ValueWalk:

http://www.valuewalk.com/2012/01/subordination-101-a-walk-through-for-sovereign-bond-markets-in-a-post-greek-default-world/#.TydztYH7GKQ – where a blog by Felix Salmon is quoted.

Felix Salmon is very technical but never the less extremely pertinent as to both the general debt crisis and the specific Greek issue. Perhaps it has escaped the deserved attention due to lack of sufficient naked flesh and hanging entrails:

Mr. Salmon concerns himself with about 25-40 billion Euros of the total public Greek debt of around 330 billion Euros, but that is the significant part of the debt (in this context) – as it is issued under non-Greek (primarily UK-law). The UK-law has strong creditor protection in its Collective Action Clauses. Please note before your eyes glaze over:

A)     The part issued under Greek law is not a very big problem, because Greece can change its own laws as they please – or is arm twisted into desiring. They can choose not to honor the debt partly or in full.

B)      The part issued under UK-law demands that between 2/3 and ¾ of the creditors agree to a “haircut”. This means that a minority of 1/3 to ¼ can effectively block a restructuring.

That is probably why the sovereign Greek rate dropped briefly last year – somebody was buying these bonds at a bargain price in order to obtain a blocking minority – and eventually obtain a better deal than the one creditors under Greek law will get.

This factor is probably the originator of the commitment to report debt issuing plans for approval in advance.

What has that got to do with the Tobin tax of 0.1% on all transactions France is now putting into effect rumored only to include stocks and not bonds? The answer is: Everything!

The fear has been that it just would lead to trade disappearing from the European stock exchanges. The Swiss are already licking their lips; but they might be gloating too soon. All though a worldwide adoption of the standard is unlikely it might be extended to all assets quoted on European stock exchanges.

What has not been noted is that Merkel used the expression “make nails with heads” – meaning: Make things properly. This probably in this context means that the laments of the bankers have been heard; but will not form the basis of the decisions.

Now we have to draw the line back to the Greek bonds:

Indubitably the tricky construction with issuance of sovereign debt by the Greeks und UK-law has been/is a major complication. One thing is for the UK to stand outside the Euro; but to let the City of London sabotage the Euros stability and debt restructuring plans – well that will have consequences! France is – as usual – perhaps jumping the gun; but the aim is in no doubt: The power of the banks to play around (the British in particular) is going to be chopped.

That dirty trick with the UK Collective Action Clauses is neither overlooked nor forgotten.

Significantly David Cameron is furious, as this will be a major blow to the British finance sector.

As an aside:

The Danish Prime minister Helle Thorning-Schmidt and her secretary for economy have been unsure on their position on the Tobin tax – considering that Danske Bank as the major Nordic trader has threatened with job losses. The opposition has issued statements against the Tobin tax; but through lieutenants.

There is little doubt that heavy lobbying on the part of the bank(s) has taken place; but considering the very low prestige banks have in Denmark that is liable to be of little consequence.

If Helle Thorning-Schmidt can pull this one off: Getting all the benefits of the Euro (among which limitations to running into debt) and none of the cumbersome problems with sovereignty – well then the votes can be found. Only problem – how will the public debt look like, if/when the major banks will have to be recapitalized in nationalization?

And Thorning can make Sarkozy eat his flippant remark to her: “Butt out – You are not a Euro state.”