Opinion

Felix Salmon

The politics of debt in Zimbabwe

Felix Salmon
Mar 4, 2010 14:58 UTC

It’s worth remembering, in an era where Greece and other countries are being pilloried for fudging the amount of their national debt to make it look smaller than it actually is, that there’s another group of countries which is often accused of the equal and opposite crime. Governments looking to take advantage of the World Bank’s HIPC program, in which they get classified as Heavily Indebted Poor Countries, need to demonstrate not only that they’re poor but also that they’re heavily indebted. And so they have an incentive to fudge their books to make it look as though they owe more than they actually do. If they’re successful, the World Bank, Paris Club, and even private creditors are likely to more or less wipe out the debt entirely.

But if there’s one country which is pretty much guaranteed to look at the economically obvious thing to do and then fight and shout to do exactly the opposite, it’s Zimbabwe. And Zimbabwe’s ambassador to China, Christopher Mutsvangwa, has a hugely entertaining 1,500-word rant about exactly why Zimbabwe should not want to achieve HIPC status at this “most propitious time for the country”. I’ll quote the beginning, you can take it from there:

Harare — HIGHLY Indebted Poor Country status is not the answer to the Zimbabwe debt problem.

Zimbabwe is not Haiti.

The country does not suffer from inherent incapacity that would require outside management of its resources for it to get out of the debt, which was exogenously induced.

For a start, Zimbabwe has much-valued assets. The modern industrial revolution added more than mere gold to its treasure trove of mineral riches.

Zimbabwe has diamonds, platinum and chrome — minerals that feature among the creme-de-la-creme of international mineral Olympics. Zimbabwe also has coal, methane, iron ore, limestone, lithium and a bevy of other minerals in abundance.

Add to these mineral resources, the fertile, well-watered soils that can support flourishing agro-industrial activity.

Top this all with one of Africa’s most developed human resources base that is a product of post-independence’s educational policy.

Be wary of Spartans bearing gift gourds

Maybe Europe could have benefited from Zimbabwe’s post-independence educational policy: the Zimbabweans are clearly more “wary of Spartans” than the people at Eurostat were.

(Thanks to Matthew Tubin for the find)

COMMENT

The expropriation and expulsion of what was by far the most productive portion of Zimbabwe’s “human resources base” by a chief executive with multiple degrees from Western universities bears testimony to the limitations of “education.”

Recolonization seems to be their only hope at this point.

Posted by Mega | Report as abusive

The nonsensical political rhetoric on Greece

Felix Salmon
Mar 1, 2010 15:43 UTC

Can someone explain to me why and how politicians seem to be particularly susceptible to getting the issue with Greek credit default swaps completely backwards? And why reporters simply parrot their nonsense, rather than calling them on it?

Exhibit A is Carolyn Maloney — my very own representative in Congress, whose district covers all of the big Wall Street firms in Midtown — as reported in the FT:

Ms Maloney compared the use of credit default swaps in the Greek situation to the “activities that brought down American International Group”, referring to the US insurer that collapsed and was bailed out in September 2008.

Er, no, Carolyn. The activity which brought down AIG was the fact that AIG sold a lot of credit default swaps on subprime mortgage bonds — essentially insuring those bonds against default. When they defaulted, AIG became insolvent. Greece, by contrast, has never written any credit default swaps on anybody. If there’s any issue with CDS in Greece at all, then it’s with people buying CDS on Greece — insuring themselves against the risk that Greece defaults. There’s no “shocking echo”, to use Maloney’s words, of AIG in Greece at all, except if you don’t understand the first thing about how credit default swaps work.

Exhibit B is German financial watchdog BaFin, as reported by Reuters:

Germany has taken steps to identify speculators in Greek debt to try to prevent them from profiting unduly from any bailout of the ailing euro zone economy, a source with direct knowledge of the matter told Reuters…

“It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators,” the source told Reuters.

“The result of the ‘Greek tragedy’ is that the political environment has become such that the Credit Default Swap (debt insurance) problem has come to the fore.”

Again, this makes no sense, since if there’s a problem here it’s with people using the CDS market to bet against Greece. If and when Greece gets bailed out by Germany, the bailout will enable Greece to pay its debts, and anybody who’s short Greece will lose money. What’s more, the CDS market is a derivatives market, which references Greek debt but which sees none of the cashflows from it. Any money flowing from Germany to Greece will end up in the pockets of Greece’s bondholders, where it belongs — there’s really no mechanism at all whereby it can end up in the CDS market.

So how could these evil speculators profit “unduly” from a German bailout of Greece? That key question is never asked, or answered. Yes, it’s possible that somehow they’re betting on volatility in Greek debt, rather than making big directional bets, and that activity in the CDS market has increased that volatility. But even then a German bailout would almost certainly reduce volatility, and therefore the profits on their trade.

But of course it doesn’t matter that these political actors are making no sense: it’s all a big Kabuki, wherein anybody bashing banks in general, and Goldman Sachs in particular, gets automatic political brownie points. And there are no points at all, it seems, for basic financial literacy.

COMMENT

Well technically, AIG became insolvent because of two facts:

1) The price declines on the underlying bonds – not defaults – triggered more collateral payments.
2) The downgrades of AIG also triggered more collateral payments.

The defaults on the subprime bonds were tangential to AIG’s bankruptcy.

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Fire the lot of ‘em!

Felix Salmon
Nov 19, 2009 14:12 UTC

John Hudson has an interesting round-up of responses to the signs of humanity from Goldman Sachs on Tuesday: I’m definitely the outlier in a sea of commentators saying that they’re tiny, meaningless, and an attempt to deflect attention from the bigger issues surrounding the bank.

Leave it to Charlie Gasparino, then, to veer wildly in the opposite direction:

Goldman is putting aside a whopping $500 million — the largest such donation in company history — to help small businesses.

I wondered if it ever dawned on Blankfein or his partner in this charity binge Warren Buffett — also a Goldman shareholder — that this money may be theirs to do as they please. Such a major donation like this one, I am told by one prominent Wall Street CEO, should have been approved by all shareholders…

The last thing shareholders need is such overt do-gooderism… what say did the rank and file shareholder have in such a major cash layout? None, which should spark plenty of debate among shareholder rights advocates…

I think it’s about time for Lloyd Blankfein to step down and resign as CEO of Goldman, and really start doing God’s work by sparing the rest of us the stupidity of listening to his excuses.

Let’s put this in perspective, here. $500 million is less than a buck a share; Goldman, which is trading at $177, moves more than that on an average day just thanks to market noise. And a large part of the $500 million is coming from the Goldman Sachs Foundation, which already has the money: it isn’t fresh shareholder funds. Blankfein runs a bank making $3 billion a quarter, and Gasparino thinks he should resign over a commitment to spend $500 billion over five years? Very odd.

But clearly calls for resignation are in the air these days, what with Rep. Peter DeFazio calling for both Larry Summers and Tim Geithner to be fired. Maybe it’s the Palin book which is sending everybody scurrying to these corner positions. Whatever it is, it isn’t helpful.

COMMENT

Many, though not all, Americans are 100% pure imbeciles! It goes without saying that this situation is a problem when we know that “every vote counts”… Viva le Francia!

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