Entropic Bits

Slovenian Bail-In Highlights Perverse Facet of Banking Union

Posted in Economics, Europe, Legal by Arnaud Houdmont on April 17, 2016

I120404_114131_147183At the time of writing the Court of Justice of the European Union (CJEU) in Luxembourg is still examining the legitimacy of the 2013 decision by the Bank of Slovenia to expropriate all holders of subordinated bonds and shares in recapitalised Slovenian banks.

Although few refer to it as such, the wiping out of shareholders’ capital and subordinated bonds as part of the central bank’s recapitalisation of the three largest banks in the country amounts to what is now commonly known as a bail-in.

Bail-in rules for Eurozone banks are part and parcel of the Bank Recovery and Resolution Directive (BRRD) and are designed to stop taxpayers from having to foot the bill for saving banks from bankruptcy. Instead, bail-in rules will oblige private shareholders and depositors to automatically bear losses equivalent to 8% of the bank’s liabilities before any public support can be made available to bail them out. However, and lest we forget, individual investors and depositors are also taxpayers.

Considering that the BRRD is due to come into force on the 1st of January 2016, the Slovenian case is getting surprisingly little attention in the international press, even though Slovenian bondholders are not giving up without a fight, first taking the case to the Constitutional Court of the Republic of Slovenia and then all the way to the CJEU.

The Constitutional Court of the Republic of Slovenia found that the expropriation of bondholders by the Bank of Slovenia entailed “a severe violation of existing entitlements thus contradicting the principles of legitimate expectations” and questioned “whether such drastic violation of private property is truly proportionate to the public benefit pursued by the measures”.

Slovenia’s Finance Minister has defended the measures by referring to the fact that under EU state aid rules public funds can only be redirected to recapitalise banks after existing shareholders and holders of subordinated debt participate in the restructuring. These bail-in amendments to the Slovenian banking act are now being challenged on multiple grounds by VZMD, the Pan Slovenian Shareholders’ Association and member of Better Finance.

Since the BRRD is not due for transposition into national law until 2016, as stressed by VZMD and other representatives of expropriated bondholders, Slovenian authorities insist instead on the binding nature of the Banking Communication by the European Commission “on the application, from 1 August 2013, of State aid rules to support measures in favour of banks”.  VZMD states that the ‘Banking Communication’ of the European Commission was suddenly deemed binding (only in Slovenia and only at that time) and conveniently interpreted as to justify the wholesale cancellation of all subordinated bonds in all recapitalised banks. The matter is now in the hands of the CJEU who will be investigating the claim by the Bank of Slovenia that the Banking Communication is binding and that the legal provisions in question are merely enacting these rules.

According to VZMD, authorities also resorted to a number of blatant falsehoods about the extent of the supposedly catastrophic predicament of Slovenian banks in December 2013 in order to defend the expropriation. To the same end, the dismal macroeconomic situation was also significantly exaggerated, even though, as early as 4 December 2013 and just a couple of weeks before the official statement announcing the expropriation, an official statement was published on Eurostat announcing that the quarterly GDP of Slovenia remained stable.

The European Commission’s DG Competition has not been spared of criticism either as evidence emerged of pressure by a minor EC official to implement a complete wipe-out of all subordinated bonds as the precondition for him to forward the case to his superiors and recommend state aid to be granted.

With the implementation of the BRRD looming on the horizon, the Slovenian case highlights the many issues remaining to be addressed on the path towards an effective banking union.

Banking resolutions that don’t respect the rights of individual investors and depositors carry significant social costs. Since the onset of the financial crisis, individual savers and investors have borne the brunt of these costs.  Not only are they paying for bailouts in their capacity as taxpayers, they are also suffering losses due to financial repression and negative returns on bank savings.

Adding insult to injury, depositors will from now on be put on the front-line and “bailed-in” by having part of the debt they are owed written off in order to rescue the borrowing institution. This is unacceptable and needs to be addressed as a matter of priority in the further development of the Banking Union. At the very least, assurance should be given that the bail-in of depositors is a measure of last resort.

Above all the Banking Union should continue to tackle what can only be described as the “privatisation of profits and socialisation of losses” by reforming  “bail-in”  rules  to  ensure  the  parties  responsible  for  bank  failures are the first to pay for resolutions instead of depositors and savers.

It’s a perverse system that would see savers and depositors pay instead of the parties responsible for bank failures, such as bank executives and supervisors.


TTIP and ISDS: a storm in a teacup?

Posted in Economics, Europe, Legal by Arnaud Houdmont on April 17, 2016

storminateacup.112224Already two years down the line and the 10th round of TTIP (Transatlantic Trade and Investment Partnership) negotiations last week nevertheless had a distinct air of déjà vu about them, as they once again broke down over the Investor State Dispute Settlement (ISDS) provision of the proposed treaty.

But what is all the fuss really about? Why do so many people feel so strongly about this ISDS instrument? The BBC World Service took a deeper look at the issues at stake in a very comprehensive 25 minute radio documentary that goes some way towards answering these, and other, questions.

In short, the ISDS instrument would allow investors on one side of the Atlantic to sue a government on the other side if they believe the government in question damages their commercial interests. This is nothing new. Bilateral investment treaties have since long contained provisions similar to the disputed ISDS and proponents will argue that such agreements prevent states from resorting to force in order to get property back or protect companies against nationalisation.

What is new though is that lawyers finally caught on and discovered the power of these instruments at the turn of the millennium. Whereas more than 1500 bilateral investment treaties were in place by then, they were largely ignored and forgotten until lawyers started realising their potential. As the International Dispute Resolution Center in London attests, this very secretive arbitration business has been booming ever since.

Seen as anti-democratic and rigged in favour of investors, these secretive courts and the ISDS system have come under increasing scrutiny and criticism over the last decade. Some high profile cases have shed a negative light on these bilateral investment treaties, with various instances of health and environmental policies being challenged by investors.  (Listen to the BBC broadcast for some very illustrative cases of ISDS controversies, including the tobacco industry in an Australian case and a gold mining company in El Salvador.)

The tide seems to be turning. Governments that happily used the ISDS instrument in the past to protect their investors and investments abroad, now face ISDS claims of their own. Germany, for instance, is now being sued for preventing investments in atomic energy.

Proponents of the ISDS system argue that so far governments have defeated about 40% of the cases brought against them, and present such statistics as proof of fairness of the system. It is important to remember though that only investors can put forth an ISDS claim and that dispute settlements are shrouded in secrecy even though they often have a direct impact on the public interest, especially in environmental and health matters.

To address these issues EU Trade Commission Cecilia Malmström proposes a new version of ISDS, maintaining the right for governments to regulate in the public interest and excluding health and environmental issue from the ISDS scope.

Better Finance, the European Federation of Investors and Financial Services Users, would rather see an ISDS of last resort. In the case of investor abuse, Better Finance believes local court systems are best placed to provide adequate redress. Even when investors are denied access to the local judicial system, a state-to-state dispute settlement system that can address the investment barrier would be much preferable to ISDS.

Better Finance will agree to the use of ISDS when, and only when, a state-to-state dispute settlement system does not lead to adequate redress. In this case the ISDS mechanism as currently stipulated in TTIP would still need to be significantly amended to address crucial issues of transparency. ISDS would also need to be available to all parties including states and domestic investors.

A situation where investors would have the choice between different courts or jurisdictions in order for them to pick out the one most favorable to their particular case must be avoided at all cost.

As the BBC documentary illustrates, the inclusion of one or another version of ISDS in the TTIP agreement would have important implications with regards to democratic principles and the concept of sovereignty. However, investors themselves, according to some, seem to attach fairly little importance to ISDS provisions when making investment decisions.  So is it all but a storm in a teacup?

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Smart Beta: deceiving investors at the press of a button?

Posted in Economics, Europe by Arnaud Houdmont on May 12, 2015

image5“86% of investment managers stunk in 2014”
“Active Management Funds Underperform Over Almost All Time Frames”
“Epic Fail: Another Dismal Year for Active Management”
“Can anything save active management?”

These are just a few of the latest headlines confining the “active management” of investment fund portfolios to the dustbin of history. Following years of persistent failure by the majority of fund managers to outperform the market, the evidence in favour of index investing – also known as “passive” – is building up.

Active management investment companies believe it’s possible to outperform the market and produce better returns than passively managed index funds. However, bar a few exceptions, actual results tend to demonstrate that with high fees, scarce talent and intense competition, it is virtually impossible for active managers as a whole to outperform indexing in the long-term. (more…)

Reforming the U.S. securitisation market… And what about Europe?

Posted in Economics, Europe by Arnaud Houdmont on October 15, 2014

cabanesThe rapid growth of the securitization market is said to have played an important role in the U.S. subprime mortgage crisis and was a key factor, amongst others, in triggering the 2008 global financial crisis.

Securitization is the financial practice of pooling various types of contractual debt such as residential and commercial mortgages, loans or credit card debt and selling this consolidated debt on to investors.

Better Markets, a U.S. based non-profit organisation advocating financial reform in global capital and commodity markets, reported on the adoption by the U.S. Securities and Exchange Commission (SEC) of a rule that appears to substantially improve the disclosures that must be made to investors in asset backed securities (ABS). (more…)

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Beating and Reining in High Frequency Traders

Posted in Economics, Europe by Arnaud Houdmont on October 15, 2014

high-frequency-trading1European Union lawmakers plan to significantly restrict high-frequency trading with new rules that would rein in high-frequency trading (HFT) and tighten up rules related to the use of so-called dark pools.

High-frequency traders use software that allows trading at lightning speed. Whereas large firms have access to such technology, critics claim that smaller private investors find themselves at a disadvantage and that HFT can be destabilising.

The envisioned limits to HFT are part of a larger EU legislative effort dealing with issues ranging from commodity derivatives speculation to investor protection. “With these rules the EU is putting in place one of the strictest set of regulations for high-frequency trading in the world”, said EU Commissioner for Internal Market and Services Michel Barnier. “While HFT trading might bring some benefits, we need to make sure that it doesn’t cause instability, and isn’t a source of market abuse”. (more…)

The Troika Gunslingers

Posted in Development, Economics, Europe by Arnaud Houdmont on October 15, 2014

The Troika Gunslingers“A gun held to the head” of Cyprus and Portugal. That is the strong language used by several MEPs describing the Troika’s role and impact on these two bailout countries.

Whilst the Troika monitors whether bailout countries carry out the required reforms, the European Parliament in turn will now carry out its own inquiry and scrutinize the Troika’s programme. A European Parliament delegation is now visiting the affected member states. The delegation has already visited Portugal on 6 and 7 January and Cyprus on 10 January , and visits to Ireland and Greece are planned for 16 and 17 and 29 and 30 January.

Hearings in the Parliament with people involved with Troika decisions are also taking place, headed by Austrian MEP Othmar Karas and French MEP Liem Hoang Ngoc. Contributions from the budgetary control, employment and constitutional affairs committees are expected although inquiries are being led by the Economic committee. (more…)

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Financial Repression: the lesser evil or institutionalised theft?

Posted in Economics, Employment, Europe by Arnaud Houdmont on October 15, 2014

RTEmagicC_bull_02.jpgOnly since the eruption of the financial crisis in 2007, and the outrageously expensive bailouts of banks and economies, has the public at large started understanding to what extent their countries are utterly indebted. It has become clear that nearly every government in Europe and in the United States has been living beyond its means. You would be forgiven for thinking that perhaps the time has come for insolvent debtors defaulting on their loans to hand over the collateral – to hand over their assets against which they borrowed…


The Ponzi scheme of sovereign bonds

…but you would be wrong. It is essential to realize that there is an important difference between private and public debt: individual borrowers and corporations usually are required to provide existing assets to serve as guarantee against their debt, whereas governments enjoy the privilege of being able to issue bonds without any collateral. This allows countries to borrow money from citizens who, in return, receive a bond that promises repayment of the principal plus interest. Rather than providing collateral, the state refinances rather than repays debts by printing new securities in order to replace the old ones. This way public debt is simply passed on to future generations.

And the problem doesn’t stop there. (more…)

Media literacy: a digital age cure-all?

Posted in Culture, Employment, Entrepreneurship, Freedom, General, Media, Technology by Arnaud Houdmont on October 28, 2011

First appeared in The Buzzz – Autumn 2011

From SMS-language (or txtese or txtspk amongst others) to blogging to online communities to gaming… information technology forms an integral part of young people’s lives. Name the technology and it probably no longer holds any secrets for the average teenager. To the generation that never knew a world without internet, this is simply the way things have always been. Interacting with these different technologies comes completely naturally to them… to the frustration of older generations who struggle to keep up with the latest developments in technology. This ease of interaction with ICT in general comes from having been exposed to it from an early age, an intuitive realisation of its value and a genuine interest combined with a certain notion of the basics on which most ICT usage is based. (more…)

Proxima estacion: Multikulti!

Posted in Culture, Europe, General, Immigration, Nationalism, Religion by Arnaud Houdmont on March 9, 2011

First appeared in The Buzzz – Winter 2011

In October 2010 Angela Merkel told a gathering of younger members of her conservative Christian Democratic Union party that “the approach [to build] a multicultural [society] and to live side-by-side and to enjoy each other… has failed, utterly failed”, thereby encouraging the likes of Sarkozy and Cameron to give free rein to their own bigoted ideas.

Worries that Europe is losing its traditional identity have been fuelling anti-immigrant sentiments across Europe. In difficult economic times it is a time-honoured tradition for politicians to exploit such feelings and whip up popular support by targeting easy scapegoats.

Rather than idly sitting by while politicians quietly bring the idea of a multicultural society to an end, the organisers of Unity Express have plans to embark on a journey to illustrate the merits of a multicultural European society. (more…)

The Twittering Youth Revolutions

Posted in Freedom, General, Immigration, Media, Religion by Arnaud Houdmont on March 9, 2011

First appeared in The Buzzz – Winter 2011

Mohammad Bu Azizi’s self-immolation on December 17 2010 was the spark that ignited the Arab powder keg, firing up crowds across the entire Arab world. Who could have foreseen that the tragic death of a single civilian would bring down well-established regimes in Tunisia and Egypt and cause a full-blown revolution aimed at toppling Kaddafi’s regime in Libya as well as numerous other revolts across the Arab world? So how did the suicide of a fruit vendor in Tunis bring about the chain of events of the last three months?

A lot has been made by the international media of the enabling role of social media such as Twitter and Facebook in connecting people and spreading the revolutionary word. However, whereas these tools definitely facilitated communication, can it really be said that these revolutions would not have taken place or would not have been as successful were it not for Twitter? (more…)

Employing the NEXT Generation

Posted in Economics, Employment, Entrepreneurship by Arnaud Houdmont on March 8, 2011

First appeared in The Buzzz – Winter 2011

At the end of last year, Generation Europe Foundation and the FutureWork Forum (FWF) published the second report in the ‘Employing the NEXT Generation’ series, based on data gathered from more than 7,000 young people. The results were presented at the Employment Week Forum in November. Youth unemployment cannot simply be explained by the financial crisis. What are the real causes of the problem? Why are young people so vulnerable? GEF and the FWF put these questions directly to young people and also asked them to identify potential solutions. What we found is that the reasons are manifold and interrelated, yet can roughly be summarised as: ‘No experience = No job. No job = No experience’.

The next generation knows it is in trouble – and they are unmistakable in their message to employers, educators,
decision-makers and stakeholders that the current status quo just won’t cut it. A fundamental mindshift is called for. Educators and policy-makers in the field of education are criticised for their inability to anticipate and adapt to changes in job requirements and requisite skills. As a result of this failure, a lot of highly educated young people enter the job market, equipped with an array of diplomas but utterly unprepared for the jobs they are hoping to land. (more…)

The new face of censorship?

Posted in Culture, Freedom, Media by Arnaud Houdmont on October 29, 2010

First appeared in The Buzzz – Summer 2010

Whether it be the iPad or the freshly redesigned iPhone, Apple fans around the world are eagerly anticipating the arrival of the latest gadgets, all fed by the iTunes platform. Music, movies, books, games, applications… you name it, you can find it on iTunes. That is, if Apple agrees with your tastes.

For many years now, it has been argued that the rise of new media is eroding government censorship and improving press freedom around the world. Witness the role Twitter played in the protests following the presidential elections in Iran last spring. At the same time, however, government censorship is adapting to the digital age, as evidenced by the so-called ‘Great Firewall’ of China which filters all internet traffic into that country.

While government suppression of the media garners outrage, might there be another face of censorship which has largely escaped our attention? To wit, the trend toward self-censorship in the media. More and more examples are surfacing of restrictions placed on content in order to avoid upsetting certain interest groups as well as the values of the media owners and advertisers. (more…)

IPR: legal aid or hindrance?

Posted in Economics, Legal, Media by Arnaud Houdmont on October 29, 2010

First appeared in The Buzzz – Autumn 2010

Everyone’s seen it. It’s not like we are given a choice: when we finally sit down to watch a DVD in the comfort of our own home, we are invariably reminded that downloading a movie is really the same as stealing an old lady’s television… and you wouldn’t steal an old lady’s television, now would you?

Copyright law exists to maintain a balance between the rights of creative professionals and the rights of consumers. Artists have the right to be fairly compensated for their work, while the public has the right to access culture and knowledge. Over the past ten years, intellectual property rights (IPR) – copyrights, patents, trademarks, etc. – have become the subject of a fierce debate.

At the heart of the debate is the question of whether IPR encourages or stifles research and creativity. In essence, how does an economy best promote innovation? The internet has fuelled the debate by blurring the traditional distinction between creators and consumers. Nowadays, it is just as easy to download content as it is to publish online. (more…)

Putting Green Entrepreneurship First

Posted in Development, Ecology by Arnaud Houdmont on October 28, 2010

The Kingmakers of Lisbon

Posted in Europe by Arnaud Houdmont on November 13, 2009

First published in the GE Vibes – November 2009 issue 18 / An abbreviated version appeared on cafebabel.com

If rumours are anything to go by, the culmination of a long, outdrawn and rather undemocratic process that is shaping the future of Europe is nigh.

Following a preliminary round of consultations with the European heads of state, the Swedish Prime Minister Fredrik Reinfeldt decided to convene an informal summit on the 19th of November during which he intends to put forward one candidate for each of the two European top posts. ‘It could be that a lengthy dinner at the European Council actually delivers someone else’ he announced, suggesting that the candidates that have been mentioned in the European media so far are not the only ones vying for the positions of President of the European Council and High Representative for Foreign Affairs and Security Policy respectively.

The image it evokes is that of a bunch of statesmen enjoying a meal whilst calling out the names of the candidates they are backing. Not exactly an example of democracy in action… but arguably a fitting continuation to the ratification.

On the 2nd October, 17 months after the first referendum, Irish voters were invited to rethink their original position and ended up voting in favour of Lisbon. For the EU institutions not taking ’no’ for an answer back in 2008 eventually paid off as the last remaining obstacle was thus removed (save for the minor detail of allowing the Czech Republic to opt out of the European Charter of Fundamental Rights in return for Václav Klaus’ signature on the treaty) and European leaders could turn their attention to the real business at hand: the distribution of posts. (more…)

Kyoto is dead! Long live Copenhagen!

Posted in Ecology by Arnaud Houdmont on October 13, 2009

First published in the GE Vibes – October 2009 issue 17

Everybody’s heard of the Kyoto Protocol… It was adopted in 1997 and entered into force in 2005, committing the 183 countries that ratified the environmental treaty to reduce greenhouse gas emissions. In short, the signatories agreed to reduce their collective green house gas emissions by 5.2% from the level in 1990 by 2012.

It has not been without criticism… On the one hand, many experts believe the Kyoto Protocol to be inadequate and thus incapable of delivering a reduction in emissions. On the other hand, critics argue that the costs attached to its implementation by far outweigh the benefits… On both accounts, it merely represents a drop in the ocean.

So far it has proved, at best, partially successful… Initially, emissions declined in the early 1990s, but soon they started rising again. Since 1994, emissions from developing countries (not committed to reduction targets) have been on the rise… (more…)

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Editorial for GE Vibes – October 2009

Posted in General by Arnaud Houdmont on October 13, 2009

There is a rumour going around that the end of the financial crisis is in sight, that there’s light at the end of the tunnel… that we’ll soon be able to return to business as usual. In fact – for those who managed to hold on to their jobs over the last few months – in many ways it already is back to business as usual…

It will be years before the extent of the damage inflicted by the financial crisis becomes apparent, yet nearly all the financial centres of the world appear virtually unscathed and unchanged, as if nothing happened. Actually, there seems to be an increasing discrepancy between the political rhetoric of change and financial regulation and the economic reality on the ground… that nothing has really changed.

Nothing really changed in Europe either, where Angela Merkel and Jose Socrates were re-elected to office in Germany and Portugal respectively. Nor were they the only ones to be re-elected this month… José Manuel Barroso is returning to his office in Brussels where he will continue to work as President of the European Commission. (more…)

The Last Puff?

Posted in Health by Arnaud Houdmont on September 13, 2009

Firts published in the GE Vibes – Issue 016 in September 2009

Ready for an EU-wide smoking ban in public places?

The smoking debate is more complex than expected …With tobacco being the single largest cause of avoidable death in the European Union, representing roughly 15% of all deaths, it comes as no surprise that Brussels is calling for an EU-wide ban on smoking in public places. Currently legislation dealing with tobacco and smoking is different in all Member States, ranging from an outright ban in some countries, to a ban at work in others … Others still, have implemented highly inventive tobacco regulations where, for instance, smoking is allowed in public spaces as long as food represents less than 30% of sales. Other complex variations on the theme exist… As of 2012, possibly more out of a desire for tidiness and efficiency rather than a concern for public health per se, the European Commission aims to simplify the situation and have all 27 Member States agree on an outright smoking ban. This proposal, according to EU Health Commissioner Ms Vassiliou, enjoys wide “support from the general public”. (more…)

The Headscarf Debate

Posted in Culture, Europe, Immigration, Nationalism, Religion by Arnaud Houdmont on July 12, 2009

Human Rights or Individual Freedom, Make Your Choice

(First appeared on Libertarian.be on 11/07/09 under the title “The headscarf: human rights or individual freedom?”)

Since France banned the Islamic headscarf and other symbols from all French state schools in 2004, the debate it sparked has resurfaced time and again over the last few years. It did so recently, at the end of June, when public schools in Antwerp decided to ban the headscarf from the first of September 2009.

Astonishingly public opinion is divided between two simplistic and inadequate positions to which adherents of either camp have pledged their unquestioning allegiance. On the one hand champions of cultural diversity and freedom of expression (and obviously Muslims in general) are aghast and want the ban lifted immediately. As an ardent advocate of freedom in any shape or form, this author has had to repress a natural tendency to join this side of the debate. On the other hand, nationalist preservationists have entered into an uneasy alliance with women’s rights defenders and proponents of the separation of state and church, in defence of the ban. (more…)

“To BE or not to BE”

Posted in Nationalism by Arnaud Houdmont on May 1, 2009

Belgium’s Last Chapter

(A slightly different version first appeared on Libertarian.be on The version below was later published on www.generation-europe.eu.com.)

The summer holidays are coming to an end, politicians are coming back from the beach and Belgium’s Prime Minister, Yves Leterme, has returned from his bout as sports columnist in Beijing. Once more all Belgians can look forward to months of futile, and rather absurd (Belgian surrealism at its best) discussions between Walloon and Flemish politicians on a senseless constitutional reform.

For nearly one and a half century Belgium constituted a nation state with a centralised government based in Brussels. It was only in the seventies, under Flemish nationalist pressure, that the country embarked on the slippery slope of de-facto federalism. It is common knowledge that federalism as a result of antagonism (rather than consensus) should be approached with caution… but five state reforms later and all caution is out of the window! The last forty years saw the end of most vital national institutions such as political parties and the national television and radio stations, having all regrouped on linguistic basis. As a result of five successive state reforms aimed at pleasing everyone, the Belgian political scene has become an unintelligible mess for politicians, citizens and visitors alike.

Since 1993 Belgium is officially a federal state – with remnants of a federal government – consisting of three language communities, with roughly six million Dutch speakers in the North of the country and a minority in Brussels, 4 million French speakers in the South and a majority in Brussels, as well as a German-speaking community, which has about 70.000 inhabitants. Each language community has its own parliament and government, responsible for the control of culture, education and some aspects of public health care. Besides that, to make matters more complicated, Belgium has three non-congruent (regions and communities overlap but do not coincide) regions with their own competences such as economic development, infrastructure/transport, environment, housing, agriculture, some aspects of employment, energy and water distribution, etc… Belgium would thus have seven governments and seven parliaments, were it not for the propitious merger of the institutions of the Dutch-speaking community and the Flemish region, leaving it with only six! (more…)