Why the Greek Bond Swap is Just Great for London

Agreed, we?re all just waiting now to see how the Greek bailout is going to fail and when. The whether is, for most of at least, already assumed.

But there?s an interesting little coda to the whole story. The vast majority of the bonds in issue were issued under Greek law. Last week the Parliament changed the law about those bonds. The Collective Action Clauses (ie, what percentage of the bonds do we have to get to agree to something to make it a voluntary agreement) were changed. Yes, governments can do this: when they find that their own laws preclude them from doing something they?d like to do then they can and indeed sometimes do go and change those pesky laws.

Of course, the more often a government does this the less people trust the rule of law and the certainty of contract in that country. Which is what is happening with the new bonds that are being issued as part of this bailout. In brief, here:

The bond swap will be run from London by Deutsche Bank and HSBC.

In fact, it?s not so much that it?s being run from London, it?s that in a legal sense it is actually happening in London. Here?s the actual agreement, courtesy of the FT. Clause 25 on page 31. The new bonds are being issued under English law. That means that any court cases will be in English courts. Under English law and the only people who can change that will be the British Parliament.

It really does say something about a country when it?s not just the finances of the place that people don?t trust any more but the very basics of the legal system and contracts, no?

I would in fact go further. There are any number of continentals, large numbers of politicians among them, who are mystified as to why the City of London is one of the great international financial centres of the world. In fact, in international (as opposed to domestic like New York) finance it is the centre in the world. Why is it that this group of a few hundred thousand people is able to suck most of the wholesale financial markets out of the other countries of Europe?

To which at least part of the answer is that it provides, as the above Greek bond swap shows, something that financial markets value highly. That combination of rule of law and certainty of contract.

Which should be a warning to politicians of every stripe and country. You mess with those important things at your peril. Doesn?t matter how well it plays in domestic politics if you violate them, doesn?t really matter how good the short term results. Once you?ve lost your reputation for offering those valued things those who value them will simply leave and do business elsewhere, where they can enjoy those things they value.

Source: http://www.forbes.com/sites/timworstall/2012/02/26/why-the-greek-bond-swap-is-just-great-for-london/?feed=rss_home

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