IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Constant attacks on tax havens and hedge funds by some politicians and statesmen is at least inappropriate. As a matter of fact, it is thanks to “speculators” that we have learnt about the pitiful state of public finance in several states (for example in Greece). On the other hand, international financial markets are the unique source of liquidities for troubled States. This is the point of view of Nicolas Lecaussin, Director of Development at IREF.
Most European countries, as well as the United States, are again at war with what remains today of financial liberty, namely tax havens and hedge funds. This despite the fact that, few weeks ago, the Director of the UK Financial Services Authority (FSA), Adair Turner, revealed that a report from his agency found that hedge funds didn’t play an important role in the crisis (you can read the speech of Adair Turner here).
Hedge funds are speculative funds (the first one has been created in 1949), which are usually selling short and are helping to rapidly neutralize the variations on the stock exchange. Some hedge funds are also owners of equities such as raw materials. They typically act quickly to grasp profit opportunities resulting from market variations. Today, there are more than 4000 hedge funds in the world, managing some $400 billion (among them the best known are George Soros’ Quantum Funds—George Soros being curiously a leading voice for the “regulation” of capitalism—or also Tiger Funds).
The hedge funds are the only funds that are not so far under the control of governments or other authorities. The « speculation » revealed the level of Greek’s indebtness About 20% of the hedge funds have disappeared since the beginning of the economic crisis, without the intervention of any commission or regulatory authority. More importantly, hedge funds, together with tax havens provide liquidity to those who need them. A study from the Alternative Management Group estimates that, if new regulations were imposed on financial markets, the Europeans will lose about € 25 billion of their pensions. As a matter of fact, even the States need those markets where they can borrow money when they decide to increase the public debt.
Let’s take the example of Greece. The politicians blamed the speculation and the financial market for the economic crisis that hit the country. Nothing is further away from the truth. As we have already written before, Greece is victim of its bad public policy, its debt and bad economic decisions from its politicians. More than 30% of the active population is working for the State. The cost of the bureaucracy represents every year about 7% of the GDP. And, since the adoption of the euro, the country has never met any of the Maastricht requirements!
True, in such a desperate situation of nearly bankruptcy, the Greek government has tried to find some partners (among which Goldman Sachs) ready to carry part of the debt against the promise of higher rates. As always, usury is the last resort for those who run deep into debt. But this was not enough, and one has to admit that financial markets did a good job in detecting the real situation of Greek’s finances and economy. For indeed, the warning was sent by financial markets; not by some public authority…Moreover, the pressure on the euro and on Greek bonds was released as soon as the government in Athens announced an austerity plan with the goal to save some € 4.8 billion.
So, let us keep in mind that « international speculation » is a precious signaling device that warned us about “dysfunction” but did not create it. Let us also keep in mind that Greece, as well as other countries with high public debt, is relying on the financial markets whenever they run out of liquidity. Today, “speculation” is granting a moratorium to public finance authorities. Will the States take advantage from this delay to avoid the explosion?