Taking Stock / Scissors poised over Europe
What's the connection between bond haircuts in Israel and the beards of Al-Nour's leaders in Egypt?
After ages of Israeli regulators pulling the wool over the public's collective eyes, along came Shmuel Hauser last week and put an end to the foolishness once and for all. The newly instated chairman of the Israel Securities Authority stated loud and clear that Israel has a problem with economic concentration, that its bond market is twisted as a pretzel and that the vast, heavily-leveraged business pyramids constitute a real danger to the public's savings.
Actually, investors seemed to have reached that conclusion well before Hauser opened his mouth at the Globes business conference. The fact is that the bonds of the biggest corporate pyramid of them all, IDB Holding Corporation, have spent the last month trading at yields of 10% to 18% to maturity. That is junk territory, certainly in the upper part of that range. Yields that high indicate that investors are concerned about the elaborate financial constructs that arose in this era of growing concentration.
Hauser said that when a bond is trading at a yield above 15% there is a good chance the issuer will be unable to meet its liabilities. Of the NIS 300 billion in Israeli pension savings invested in corporate bonds, more than NIS 20 billion are in debt categorized as "problematic," compared to NIS 4 billion just six months ago.
That NIS 20 billion in dodgy debt isn't a problem at the level of the economy as a whole, Hauser reassured.
He's right. But he didn't explain the real problem of a "haircut."
First, a definition. When you purchase a corporate bond you are lending the company money that it will repay you, with interest. A haircut, in market jargon, is when a company doesn't repay its bondholders in full.
The problem is that when multiple big borrowers brandish their barber shears, they risk creating a new norm, a handful of unscrupulous business barons who misuse the public's money, rule the capital market with a heavy hand and scoff at the watchdogs of the free market.
The institutional investors who manage the public's savings have a duty to prevent such things from taking root. But as long as regulators shy from tackling the problem of economic concentration there is little chance the institutional investors will take action.
Why? Because they - insurance companies; pension, provident and mutual funds, and the like - are managed by members of a small and exclusive club, the hundred or two people controlling the market. They would never attack one another, even as the public's trillion or so shekels in investments are robbed in broad daylight, as long as they can personally continue milking the public to their hearts' content.
It's not news that the public is being robbed, nor is it an Israeli problem. The looting of hundreds of millions of people the world wide is glaringly evident as Europe succumbs to its second financial meltdown in three years.
The first, in 2008, began with American financial institutions. Their implosion pulled back the curtain on a decade of wild gambles on the part of bankers who helped themselves to hundreds of billions of dollars in salaries and bonuses along the way.
The current meltdown is partly the bastard child of the bailouts from the first collapse, this time involving Europe's bond markets. Now they are falling, and threatening to take down the entire euro bloc together with them. This would put the health, education and welfare budgets of the developed economies on a forced crash diet.
The haircut is shared by the corporate-bond market rumblings in Israel and Europe's melting bond markets, but the magnitude is different in each case. In Europe the haircuts delivered to hapless bondholders could total trillions of dollars; most of the bonds are government, not corporate.
The evil hour
The main reason the European crisis is dragging out is that governments and banks don't want to admit they can't repay their monumental debts in full, principal and all interest owed.
The governments can't repay in full because their debts mushroomed over the past several years; the banks can't because much of their capital was put into the very bonds the governments can't repay.
It is in the interest of both the governments and the banks not to declare a haircut, not to admit they don't know how to repay all that debt.
The moment they admit to resorting to haircuts the public will immediately realize who the real loser is here. They'll know how much it's lost, and why. The moment the governments announce they're writing off their debt - simply not repaying it - the banks, which have been effectively bankrupt for some time, will be forced to accept direct government aid, and public rage will be further inflamed.
What's their solution? To obfuscate, to hem and haw, to delay, to whitewash; that is why central banks are injecting hundreds of billions of dollars into the markets in weird and wonderful ways, under euphemisms such as bailout bills, monetary easing, rescue funds, rescue fund for rescue funds and the like.
All these measures either postpone the evil hour or spur inflation. The leaders seem to think that the longer they fudge the harder it will be for Americans and Europeans to grasp the true dimensions of the haircuts forced upon them.
Al-Nour vs. the kleptocracy
But maybe all these efforts by the politicians to muddy the waters won't work. The 99% movement is gaining momentum, going viral globally from Egypt to Yemen, from Wall Street to Spain. Last week it infected the one place that had appeared to be completely immune: Russia. Putinland.
The protest movements that sprang up around the planet this year have a common denominator: the cry of the masses against the corrupt and corrupting ties between big business and government, against the clique of people who are robbing their future.
It is enlightening to discover that the texts of the protest movement in the freest economy in the world, the United States, are not substantively different from those of the demonstrators in Moscow last week.
No one cares anymore about left and right, communism and capitalism. People have realized these are empty labels that did not keep gangs with ties in government from looting their country's coffers while putting in place economic policies that protected their power.
While we in Israel are obsessing over the Muslim Brotherhood's views on Egypt's cold peace with Israel, the international media are reporting that the movement's main target is the corruption connections between the rich and the government.
The Muslim Brotherhood wasn't the only political movement to show gains in Egypt's latest election round. The even more radical Al-Nour movement got 20% of the vote. In addition to some of Islam's more extreme principles, its platform contains some interesting planks: free education starting with preschool, free health care and a war against monopolies and cartels. Al-Nour wants to create European-style antimonopoly agencies in Egypt.
The Financial Times quoted a young man who explained why he voted for Al-Nour: It will clean out the rot, it will return to the people the money that was stolen from them. The lad didn't seem particularly religiously observant, the correspondent wrote: He was clean-shaven and wore jeans. A vote for Al-Nour was also a vote against the robber elites, though its leaders say they have no beef with the rich per se as long as they earned their wealth honestly.
And if not? The old regime consisted entirely of criminals who surrounded themselves with cronies, the movement's spokesperson explained.
Pointing to monopolies and cartels and the ties between big business and government as the main cause of inequality and poverty has gone global. Throughout the world, national economies are controlled by tiny groups of people under the guise of democracy.
The global news media are not about to expand on this problem: After all, in most places they are controlled by the same business barons who enjoy the fruits of that economic agenda. But the Internet is shattering the silence and changing the debate.
I don't know what the future will bring. Nobody does. But as Prof. Manuel Trajtenberg, economic adviser to the Israeli government, remarked on TheMarker Television (Internet ) a few weeks back: "The next 30 years will probably be substantially different from the last 30."