The ECB has Opened Pandora’s Box
“I believe that banking institutions are more dangerous to our liberties than standing armies. “
-Thomas Jefferson
I am not going to speculate about anything this morning. No guesses about what the Finance Ministers might do on Monday, no simple addition or subtraction that the data used to forecast Greece’s return to a 120% debt to GDP ratio is a falsification of the numbers, no mention that only nineteen cents of any bailout for Greece would actually go to the country; I am not going to discuss anything except what the European Central Bank has actually done and what we now know with a one hundred percent (100%) certainty and the horrifying implications of their actions.
“There are no necessary evils in government. Its evils exist only in its abuses.”
-Andrew Jackson
The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt. They did this without objection of any nation in Europe. They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued. There is no speculation involved in these statements, there is no longer any guesswork on what might be; the ECB swapped their bonds for new Greek bonds with the assent of the Greek government and it is now a done deal.
Having then done this; the implications must now be considered utilizing the clear light of unadulterated reason. The issue now is no longer a one-off Greek issue but a full on ECB issue. We know now that the ECB can retroactively change the rules, change an indenture, so that if the ECB can do this with Greece then it can certainly do it with any sovereign debt in Europe. If they can exempt themselves from a “collective action clause” then they can exempt themselves from any clause, in any sovereign indenture, for any European country. The fact that they are now clearly senior to any other bond holder, or more aptly put, that any private bond owner is now subordinated to the ECB is one consideration but hardly the most important one. The incredibly grim reality now is that any European and all European sovereign debt can have their indentures changed by the ECB when it is to their advantage. It is the “collective action clause” today but tomorrow it could be the maturity or the coupon or any other terms and conditions in an indenture. It is Greece today but tomorrow it could be France or Portugal or Italy. The “Rule of Law” has been abrogated and tossed aside in the name of political contrivance.
“Necessity; the tyrant’s plea.”
-John Milton
Since the ECB can now retroactively change any bond contract to whatever it likes and with any nation in its dominion then the valuation of European sovereign debt must be re-examined for what it really is which is no longer what anyone previously thought. Starkly put; the bonds issued by the sovereign nations in Europe are no longer pari passu, on equal footing, with the bonds issued in the United States. We have just passed a clearly defined “break point” where the legal rules were changed to the great disadvantage of all the private debt holders. The risk of ownership of European sovereign debt is now infinitely more dangerous in my estimation than it was last week. We still do not know if the IMF will demand and receive the same special treatment but I assert that it no longer matters. The actions of the European Central Bank are all that was necessary to radically alter the value of European sovereign debt and it is just not me but any number of large financial institutions that are in shock given what has happened with one of the largest and most respected bond investors in the world telling me that “financial repression is the softer word for it.”
Leaving anger and hostility aside; European sovereign debt must now be examined with a new set of metrics. How much yield would investors demand if an IBM indenture, as an example, had language that stated “This indenture is subject, at any time during the life of the bond, to any changes mandated by the Federal Reserve Bank.” Stated another way, what yields would be acceptable to bond investors if there was a Federal statute that said “All indentures in the United States may be changed at will by the Federal Reserve Bank upon their sole discretion.” No “Rule of Law,” no judicial appeal and a fait accompli whenever desired. This is, in terrifying fact, exactly what the European Central Bank has done and if we no longer know what we are buying and if the terms and conditions of an investment can be altered retroactively at will without the consent of bond holders and to the advantage of the ECB then either we should not buy these credits, as in Atlas shrugged, or yields should be in the mid-range of junk bonds because European sovereign bond indentures now are worth no more than the paper on which they are printed.
The European Central Bank, in a very misguided attempt to protect itself, has now opened Pandora’s Box. I doubt if they even realize what they have done; but they will, most assuredly they will. The consequences of their horrendous mistake will soon be upon them as institutions not coerced or forced into buying European sovereign debt will be leaving the playing field en masse as the realization dawns upon investors of just what has taken place. You cannot fool all of the people all of the time and the people that manage money for a living are not a forgiving group when governments try to supersede their lawful rights.
“Unlimited power is apt to corrupt the minds of those who possess it; and this I know, my lords: that where law ends, tyranny begins.”
-William Pitt
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