This is a problem with the \”Spirit of the Law\” stuff

But perhaps the biggest sin of the lot was effectively to render all credit default swaps (a form of insurance against default) on sovereign debt essentially worthless, or void, by making the Greek default \”voluntary\”.

This has made it impossible to hedge against eurozone sovereign debt purchases, and thereby destroyed the market. Worse, it\’s made investors believe that the euro cannot be trusted, that it\’ll repeatedly find ways of reneging on contract. That\’s the point of no return. This is no longer a serious currency.

Yes, I agree, that\’s about CDS contracts, not taxation or anything like that.

However, it does show what actually happens when you do what you think politically correct, what accords with your view of the spirit of the law, rather than what\’s actually written down there in the law.

No one trusts you not to keep doing what you think politically desirable instead of what\’s actually written down in the law.

And yes, society, the economy, our modern world, do rather depend upon trust.

9 thoughts on “This is a problem with the \”Spirit of the Law\” stuff”

  1. So Much For Subtlety

    Sorry to quibble, but the world may be based on trust, but sticking to the letter of the law has to do with certainty, not with trust. Indeed they are not even close as concepts. If you have legal certainty you do not need to trust. Which is why people like to have their contracts litigated in London even if they are, say, Malaysian tin producers.

    Trust is important, but trusting someone to do the right thing has more to do with the spirit of the law rather than the letter. For instance, a British company just took over an Australian company. The Australian company was the one responsible for thalidomide Down Under. By law they are covered. They got a sweet heart deal from the Australian government. The new owners looked in to it and decided they would give even more money to the victims. Even though they did not have to in the letter of the law.

    Thus we know they are good chaps and I would be happy to do business with them on as little as a handshake. They are trustworthy.

    The problem here is that what these tools are demanding is not trust, not certainty, nor even equity as the law traditionally sees it. What they mean is that the law needs to bend to their ideas of proper behaviour. Even though these have no roots in the community or British history or culture. It is a naked power grab.

  2. I agree.

    Trust is far more important than contract.

    But there is now a feeling/opinion that political expediency is even more important, especially if you are doing it for the children (which seems to include all the citizens of Europe, whom it seems do not know what is good for them).

    If you don’t trust somebody, you do not bother signing a contract with them. Every contract has the basis for reneging. Why are contracts with American multinationals 40 pages long just in the preamble? ‘Cos they have included every situation where they have been screwed despite having what their lawyers assured them was a duck’s arse of a contract.

    Who is going to trust the EU or some of its members? I wouldn’t.

  3. Tim,

    You’ve got this entirely the wrong way round. They have acted in the letter of the law, but not the spirit.

    If what these cretins were doing was not in the letter of the law, then holders of CDS would be all over everyone demanding their contracts honoured, so I cannot imagine that it is. It is, however, most definitely against the spirit of the law.

    What we are seeing, to quote MoneyWeek (who got it from someone else etc), is what happens when politics and economics clash: politics wins…

    … but then economics takes its revenge…

  4. Or indeed the Mugabe/Chavez rule: you may ignore economics, but unfortunately economics might not ignore you.

  5. All the eurocrats have done is use the way CDS contracts are written to best advantage. There’s nothing illegal about that. You mention tax: I thought you were all in favour of using the letter of the law to minimize one’s tax obligations.

    The effect on the sovereign CDS market is no suprise. But the market was never that large anyway, partly because traders didn’t entirely trust the insurance to pay off when needed. Are you asking us to feel sorry for bankers who didn’t bother to read the contracts and think through the consequences before they traded?


  6. The Pedant is, as pedants often are, utterly correct here. Everything in the euro crisis so far has been done completely within the letter of the law. The only government that’s so far acted outside the letter of the law is the government of Iceland.

    If you’re paid vast sums for buying and selling financial instruments, you ought to be pretty fucking aware of what the letter of the law is, and if you rely on people being nice rather than people obeying the letter of the law, you utterly deserve to be sued to death and ruined by the angry mob of clients whose money your own idiocy has caused you to lose.

  7. John B,

    “The Pedant is, as pedants often are, utterly correct here.”
    why thank you. 🙂

    Two things though.

    thing 1:
    Everything in the euro crisis so far has been done completely within the letter of the law.
    Apart from the bailouts and the fact that pretty much everyone has been ignoring the Maastricht rules with riotous abandon.

    thing 2:
    I can quite see why the CDS contracts would not pay out on a “voluntary” default. If you don’t include such a clause, you’re going to get taken to cleaners by bond-issuers and -holders colluding to get the CDS to pay out.

    But if I understand’s Tim’s view on this, it’s irrelevant: the existing CDS contracts will already have paid out through margin payments. It’s quite possible that they are never going to get written again though – with the effects that are noted above.

    If that’s the case, then the banksters agreeing to the voluntary default looks like quite a cunning wheeze: they’ve already got their money back so are (give or take) ambivalent about whether or not voluntarily to take the haircut. But the effect is nonetheless that CDS become worthless which really properly shafts a) anyone still holding the stuff – the central banks/treasuries – and b) the governments that caused this problem since they’ll never be able to get away with this kind of rubbish again.

    Or is that just too conspiratorial?

  8. Pedant has the main point, johnb the various governments were most certainly not obeying the Maastricht rules, but perhaps you would not classify those as laws ? Well understood rules, publicly agreed to they were, and they were very widely broken in deceptive fashions.

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