Old Putrid Wounds

Pfäffikon SZ, Switzerland – Last Wednesday the ECB decided to no longer accept Greek government bonds as collateral. The ECB’s president – Mario Draghi – is an unwavering man who thinks in straight lines. How did it get to this point? It was Dutch economist and former politician Henk de Haan who, during Greece’s entry to the union, submitted a motion to fend them off. According to De Haan the Greek numbers had been overly polished. Dutch Minister of Finance at the time, Gerrit Zalm, most likely knew without a shadow of a doubt that De Haan was right. Yet the Greeks still managed to fumble into the euro. According to De Haan it was to further expand the democratic tentacles of the EU. This remarkable character trait on part of Zalm would surface again later during his tenure at the collapsed DSB Bank.

Financial engineering
Years later former Minister of Finance Jan Kees de Jager promised his Dutch subjects that everything would be paid back by the Greeks, including interest. Perhaps, in the year 2100, De Jager will be vindicated when the 18 billion euros in debt to The Netherlands will have evaporated through inflation. It is clear that old putrid wounds are slowly but surely being torn open. Meanwhile, the Greeks – through “financial engineering” – are trying to slip out from underneath the trojka’s influence. I doubt they will succeed.

Restraint
According to illustrious investors such as Bogle, Buffett and Soros, the financial world is ignoring the current risks that have been stoked by currency movements and geopolitical tensions. Their investment policy, for quite some time, has been one of restraint. Buffett is keeping approximately $60 billion in cash instead of the usual $20 billion and Soros has been partially hedging his portfolio for quite some time. Bogle notes that you must be prepared for a price drop of more than 30% and when that is something you cannot survive, you have no place on the stock market – with which I concur.

Debt tax
May I remind you that the IMF in late 2013 floated the idea of levying a one-off debt tax on savings, securities and and real estate. Advice on part of the contracted Boston Consulting Group went one step further, advising that no less than one third of your capital be confiscated. These are methods befitting a wartime situation where the oppressor forces you to part ways with your savings.

CAC clause
The so-called CAC clause (Collective Action Clause) has been built into European law since 2013. In an emergency situation holders of bonds can be disowned retroactively. In the Western media I sometimes read about Russia, but in this case it’s the European Union I’m talking about. This affects mainly holders of government bonds, life insurances, certificates of deposits, and conservatively set up fund structures. It is then no coincidence that these providers are required by law to invest in a so called “high rating”, which tend to be government bonds. Since 2013 all government bonds contain the CAC clause. Within five years roughly half of all issued government bonds will fall under this CAC clause.

Risks
In this manner other special measures have been undertaken within the European Union to force your hand and to further strangle you. This is – possibly – the EU’s way of trying to heal putrid wounds in an emergency situation. This, however, would be at the expense of many investors, pension holders and honest savers. These are all straightforward signals that the level of risks has increased. Forewarned is forearmed.

It remains for me to wish you a good weekend.


Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.