The New Sovereigns

"The only things certain in life are death and taxes" Said Benjamin Franklin some 200 years ago. Surprisingly, Franklin´s “certainties“correspond to the quintessence of sovereignty and statehood: “Death“? Well, there is no sovereignty without the monopoly over violence (including the right to make use of force, inflict pain, retain freedoms, and even kill ).”Taxes” ? Since the State is a monopoly it finances its apparatus by raising taxes. Thus according to that line of reasoning the “State” institution is among the most certain things in life. Or at least should be.

However, Capital Markets have a different opinion about that matter, at least according to the information revealed in the prevailing prices of a rather obscure but common financial obligation, the denominated CDS (Credit Default Swaps) . (For those not familiar with financial markets : CDS is financial arrangement that resembles the mechanism of an insurance policy, though instead of securing a real asset (for example, a car), the CDS covers the risk that a specific financial obligation (Bonds , for example) could become useless in case the organization ( Governments, Corporations ) that emitted the obligation cannot meet its obligations. ).

First of all lets have a look on the prices (Price : Cost of securing an amount of debt for 5 years in percentage points)

Country Price
Spain 226.84
Germany 46.62
France 78.35
Italy 158.51
Greece 988.88
UK 57.64
China 74.39
Brazil 114.10
Russia 128.55
USA 42.04

What sort of information is revealed from the above prices ? That requires a brief explanation: Since these CDs are traded in financial markets, their price reflects the markets´ perception about the odds that a country would default: The higher the risk, the higher the demand and the higher the price the buyers are willing to pay to get the insurance. So we can see , for example, that the market puts a higher price for an insurance policy against a Greek default than to the German.

Now, CDS are traded not only to cover sovereign debts but for corporation and sectors. Let’s have a look on the CDS prices for defaults of some key sectors in Europe.

Automotive 24.83
Industrial 19.19
Consumption 23.73
Energy 24.82
Finance 146.86

If we compare the first Table of sovereign States to different economic sectors, the market is pricing the risk of default of most of the states is higher than private corporations. That is a weird result ! Countries, in theory, can always print money or rise taxes in order to meet their obligations, two advantages if compared to corporation’s risks of their own country. And can we imagine that a country defaults but its business sector keeps ongoing “business as usual”? Have the Markets go mad?

The answer is NO, markets understand that under the prevailing political and social system, States are there to serve the corporations interests, and the preference will always be to protect their interests, even if that requires the State´s default. THESE ARE THE REAL SOVEREIGNS; AND THE "MARKET" IS THE EXPRESSION OF THEIR WILL . Take for example Ireland, a model country for the last 20 years: The financial bubble created by a generous financing from foreign banks became at some moment unsustainable i.e. So when it became clear that private debts cannot be paid (and someone could lose money!! ), the State stepped in and absorbed an incredible amount of debt that will be paid by the Irish citizens (estimated at 36% of the country´s GDP for many years. Another example: Spain is a country with one of the lower public debt among the OECD but sinking under a pile of private debts, well hidden under accounting trickery at the Banks balances. How do the markets evaluate the risk of the banking sector?

Santander 197.57
BBVA 206.86

Well as you can see, the banks risks are considered as lower than the Spanish state (Note: I am aware that Spanish Banks work abroad, but their lion share of their business is still in Spain). The case of the banks is more severe than other sectors as these institutions by definition owe their very existence to the State thanks to its status as lender of last resort, so a lower risk for the banks is an absurd result. Unless, as you might guess the State is not more than a loyal servant of the Banks, the corporations and their interests… and would be ready to go bust in order to secure others.

Back to Franklin´s quote, is that overwhelming and apparent unconditional State protection of the corporation’s profitability and interest a new “certain thing”? Well, markets (and ironically K. Marx….) agree on that …That the real Sov