From Mark Grant, author of “Out of the Box“
Quod ratio non quit saepe sanavit mora
Time often heals what reason cannot
It was three years ago, yesterday, when I first said that Greece would go bankrupt. The yield on the Greek ten year at the time was 4.38%.
What a long and wild ride it has been since then and the forks in the road have been marked with turmoil, disdain and an ever increasing amount of debt for this small nation. The solution for each and every problem has been more money appended by more taxes and more austerity measures and the Greeks keep lining up and will keep lining up until the cash dries up and then other conclusions will be found. You may think it is a never ending story and that the current act will go on forever but that would not be my bet nor do I think it is a likely conclusion. Whether it is the German Parliament or the IMF or some other nation in Europe under the guise of nationalism and prudence who has had enough and rightly says, “That is enough;” there is an ultimate endpoint to this game.
I think it will come during 2013 as the pre-eminent ward of the State gets shunted or, come spring, when the people are back in the Streets, the protests are peaceful no longer. The sovereign debt has been a great vehicle for trading as violent moves were marked by political expediency but the winning hands of last year may not play out quite so well in this year and the Barbarians have not yet left the gate.
The Europeans say the crisis is mostly over but given the hard numbers I say the worst of the crisis has not yet begun.
The financial conditions of Greece, Portugal and Spain are not better but worse than they were one year ago and the actual debt to GDP ratios are higher. All that stands between these countries and the guillotine is a promise by Mr. Draghi that will likely be put to the test during the next twelve months. When the white knights are talking backwards and the dormouse is threatened with keeping his head it is unwise to keep playing Croquet!
The Federal tax exempt status of these securities goes back to the Constitution under the various provisions that separate the powers of the Federal government from the States. Much is to be found in the “Commerce Clause” but that is not the only repository of the separation of powers. The 1895 Supreme Court case, Pollock v. Farmers’ Loan & Trust Co., is the basis for much of the law since then and while the 1988 case South Carolina v. Baker seemed to open the door for Congress to tax these securities if they so desired the outcome is hardly clear. As much is bandied about in the Press indicating that the laws could be changed at will; this is not the quite the case nor has it been tested. Any attempt by Congress to tax Municipal Bonds would undoubtedly be met by a hue and cry from many State governments and the legal challenges would take a good length of time so that the outcome of such a political move is not only unclear but the time that it would take to effectuate it, if possible, is years out into the future. This is why I feel that the ownership of Municipals continues to be relatively safe and that the definition of tax-exempt versus Federally taxable does not rest with Congress alone. There is a lot of legal minutia that applies to the purpose and function of Municipal Bonds and quirks abound but when it comes down to General Obligation Bonds and Revenue Bonds for general public use then to tax them would require an overhaul of the Securities Acts of 1933 and 1934 which would be problematic enough in itself. I do not say that the rabid and carnivorous in Washington won’t try but I do say that legislative changes would be formidable and that the Supreme Court would have the last word on the subject. Consequently any fears can be somewhat postponed due to the length of the process if attempted.
The old paradox: Can God make a stone so heavy that he can´t lift it?”