I am amazed at the business-as-usual reaction so far to the proposed implementation of the so-called Collective Action Clauses (CAC) in Greek bonds. Mind you, to have a CAC in a public bond is indeed business-as-usual. In fact, I was surprised to see that Greek bonds apparently do not include CACs.
Where confidence in the State of Law starts shivering is when new laws/regulations are implemented with retroactive effectiveness, whereby it is immaterial whether it is a new law governing sovereign bonds or any other new law.
I have never heard anyone argue credibly that a civilized society can advance without a well-functioning State of Law. It is not only that laws must exist; there must be a shared belief in society into that State of Law.
Any retroactive effectiveness of a new law severely shatters the belief in the State of Law. Going forward, every potential foreign investor in Greece will have to ponder in depth to what extent he can trust laws which may be changed with retroactive effectiveness.
Personally, I think to "play around" with retroactive effectiveness of a new law is about as good an instrument to scare foreign investors away as any!
Where confidence in the State of Law starts shivering is when new laws/regulations are implemented with retroactive effectiveness, whereby it is immaterial whether it is a new law governing sovereign bonds or any other new law.
I have never heard anyone argue credibly that a civilized society can advance without a well-functioning State of Law. It is not only that laws must exist; there must be a shared belief in society into that State of Law.
Any retroactive effectiveness of a new law severely shatters the belief in the State of Law. Going forward, every potential foreign investor in Greece will have to ponder in depth to what extent he can trust laws which may be changed with retroactive effectiveness.
Personally, I think to "play around" with retroactive effectiveness of a new law is about as good an instrument to scare foreign investors away as any!
I am afraid that, unfortunately, this may also have a negative effect on the trust of investors in the government bonds of other European countries. As a result we may all have to pay a price for this story.
ReplyDeleteCouple of reactions I've noticed - both were widely predicted.
ReplyDeleteSwaps Arbiter to Discuss Merit of Greek CDS Question - decision Wednesday 5PM GMT
Greece In Selective Default, S&P Says
Follow up to yesterdays comment
ReplyDeleteISDA Determinations Committee Accepts Question Related to a Potential Hellenic Republic Credit Event - Meeting on Thursday Mar 1