Dylan Grice on sovereign comeuppance | FT Alphaville

Dylan Grice on sovereign comeuppance

Maybe all the Anglo-Saxon central banks have done is create the illusion that our sovereigns are more solvent than they are, and that our budget constraints are really a safe distance away. But I don’t think they are. And I think the truth gets out eventually. The Enrons, the Allied Capitals, the Bernie Madoffs … they all get their comeuppance.

That’s from SocGen’s Dylan Grice, who seems more than a little bit annoyed by government’s abilities to fiddle with the amounts they can borrow (their budget constraints).

For Grice:

The simplest way to overcome a budget constraint is through theft. Thus, taking a leaf from the government of Argentina no doubt, the Portuguese government raided its own pension fund to meet its 2011 deficit targets, having raided Portugal Telecom’s pension plan the year before. All in the name of the common good.

And a more subtle way is to misrepresent your underlying financial health to give the impression of being comfortably inside your borrowing capacity…  a conceit which Grice says has come home to rest in the eurozone periphery.

The accounting shenanigans eurozone governments resorted to in order to meet the entry criteria have been found out. Or at least, current CDS prices correlate well with countries’ cumulative deficit manipulations in the run-up to monetary union, asestimated by Paul van den Noord and Vincent Koen at the OECD. You can’t escape your budget constraint with financial gimmickry. You can just make it look like you have for a while.

And he is none to keen on the less immediately troubled countries either, arguing they’re just a few more steps behind. The budgetary practices of the US in particular come in for some bashing:

I have no opinion on the matter [indeed], but I do note that the US Federal budget deficit has been flattered by 2.4% of GDP a year over the last ten years by reporting it on a cash basis rather a more comprehensive accrued basis (the latter includes in the total expense of federal hiring, for example, accrued pension obligations rather than just cash salaries.) So all we know about the size of US Federal Government debt is that we don’t know how big it is. And that it’s likelyto be much bigger than we’re told.

Such “tricks” all serve to give the happy appearance of a borrower living comfortably within its budget constraint, says Grice:

So does the yield. Indeed, how can any sane person even question the solvency of government when yields are so low, snort financial ‘astrologers’ like Paul Krugman from their ivory towers. Maybe one reason is that governments have more tricks up their sleeves than the rest of us, like monopoly control of the seniorage industry.

He concludes that any illusion of solvency must eventually fade.

But we’ll close by emphasising that there is much in his analysis to dispute — the US ain’t Enron and comparing sovereigns to companies or individuals is a bit off. Just passing along some thought fodder.

Related links:
Grice: “The bear was the most important deity, the God among gods.” – FT Alphaville