Tuesday, January 24, 2012

Shooting Ourselves In The Foot

One year has passed after the beginning of the Egyptian revolution, and people now are preparing to take to the streets tomorrow in the first anniversary of January 25, 2011. So, I found that I need to analyse the past period and the current situation in the country now ... well, I think the word "analyse" here is not an accurate one since this post is going to be a group of rants more than analysis.

You sure know that the military became in charge after the fall of Mubarak. I know, the last time you checked your dictionary you found the word coup as the best one defining this, but no, we do not call it a coup here. And we don't call it so for one reason, Hope! Since calling it coup means that we already lost, and we believe the revolution is far from being over, don't we!? I believe you also heard about media crackdown, arresting of bloggers, virginity tests for female protesters, massacres, massacres and more massacres.

Victory to the Egyptian people
Photo taken by Zeinobia under Creative Commons license.

As I said, I am sure you know all of the above, so what I want to discuss here is a bit different. I want to discuss how we - as people, activists, politicians and couch party members - dealt with the situation since the early beginning.

The Yes and No Scenarios
It all started with the referendum and the constitution amendments that took place in March. Despite the fact that we were voting on some articles in the constitution to be amended, we in fact were actually voting on something else, we were voting on two different scenarios, those who voted with No were voting on forming a committee to write the country's new constitution then have our presidential and parliamentary elections later on, while those who voted in Yes were voting on having the parliamentary elections first and then let this parliament write (or form the committee that writes) the constitution later on. We had a lot of debates then, about the two options, and you sure are wondering what is the difference between the two scenarios, right? The No scenario's main advantage was that we had the chance to form a committee with all the political and social streams represented equally there regardless of their actual weight in the street, i.e. having a consensual constitution and not having the majority only dictating their will. For sure this scenario had  drawbacks as well, since many aspects of it were not clear, it wasn't clear how this committee will be formed, it also was not clear whether the SCAF will intervene in forming it or not, however we sure would have thought and fought as much as we want then to clarify all these. Now the Yes scenario on the other hand was in favour of having a constitution that represents the majority since it will come out of the womb of the elected parliament, hence the majority will have the lion's share in it and have their say in forming the constitution. I voted for the No option as I was looking for a consensual constitution myself, and it was a bit odd to see some activists supporting the Yes option, knowing that the core revolutionary mass were small in number, and also we then started to discover the fact that the majority of the Egyptians weren't with the revolution as we used to believe.
Anyway, I am not going to call this a real shooting oneself in the foot example, and for sure each one has his own calculations, but those calculations were somehow astonishing to me at that time. 

Elections Soon then Boycott It
Right after the referendum a big debate took place between Islamists and Liberals. The Islamists wanted the parliamentary elections as soon as possible, as they were sure of their victory then, while on the other hand most of the post-revolution liberals had their own arguments, their parties were just being established then and they wanted some time to be ready for the elections. At that point those whom I like to call the core revolutionaries, especially the leftists among them advocated for having the elections as soon as possible then, they said they had full trust in people's choices.
Let me first clarify something, some aspects of the democratic process are undemocratic. Voting is a democratic process, however sometimes the choices for the timing and the mechanism of the voting process can be chosen in an  undemocratic way. And that is exactly what happened, the SCAF designed the mechanism of the elections, they chose the size of the electoral districts, positive-discrimination laws for workers and peasants, the timing of the elections, etc. Seeing many of those aspects that might be in favour of old and established parties against the young revolutionary ones, I was expecting activists and politicians to try to change those rules, however on contrary, their response was, we have full trust in people and their choices, let them chose whatever they want, and let the elections be tomorrow if possible. Which are very idealistic arguments however they are too naive when it comes to that dirty political game we have here.
Any way, forget about all of the above, what really happened and astonished me was that after postponing the elections one month after the other, and then when it was time for the elections, many activist surprised me saying they are not going to run in this elections, they are against voting in it as well and they will boycott the elections process, and their argument was that they cannot participate in an elections organised by the SCAF that is killing the Egyptians!
So you push to have the elections as soon as possible, don't care about the rules that might be in favour of well established Islamic parties, and then boycott the elections, giving the parliament to the Islamist on a silver plate! Isn't this a sort of shooting oneself in the foot, or am I wrong!?

Hand Over the President Authority to the Parliament
And finally, we've reached the main point of my whole post. Many activist are calling now for handing over the authorities of the president to the parliament till a president is elected, as we now have an elected parliament, which by the way have Islamists forming more than 70% of it seats. They want this to be their main demand in January 25, 2012!! I know their argument is that we want to get rid of the SCAF as soon as possible and not wait for a president to be elected for them to hand power to it. I can't agree more, we all want to get rid of the SCAF as soon as possible, but is this our best option!? Why not call for early presidential elections instead? Why not call for forming a presidential council with a representative from each political party? I know, many people are allergic to presidential councils, so forget about this option, but still we have many options, why choose the worst option out of them all? I am a Muslim and for sure I am not Islamophobic, but come on, the newspaper of the Muslim Brotherhood, the party that got about 50% of the parliament alone, is now attacking the activists, the revolutionists and the leftists on an almost daily basis, and you activists want to hand the presidential authority over to them, and you see this as your best option!? You see putting all your eggs in one basket is the best option instead of betting on a progressive and revolutionary presidential candidate, supporting him, and calling for an early elections!? Isn't having a president balancing the power of the parliament something good we should be looking for?

The ballot box is full
Photo taken by Zeinobia under Creative Commons license.

One final note, you can agree or disagree with the fact that some people might not be ready for democracy as Omar Soliman said once, but that who use this as an excuse for preventing them from having their say is a Fascist! At the end of the day democracy is a human right, and no one should allow himself to prevent people from their rights under any circumstances. You have the full right to criticise people's choices as much as you want, or else you will be hypocrisising them, but you do not have the right to prevent them from their choices. At least this is what I believe in. 
However, with this being said, politics is full of choices and tricks, and in any democracy some rules and mechanisms are made in a non-democratic way. Take this example to know what I mean, imagine a group of 10 persons want to know whether to travel to the East or to the the West for the summer vacation. So they decided to vote. But now they are not sure what to do if they have a tie, should they chose the team with the oldest member as as the winning team or choose that of the youngest member as the winner, so, they decided to vote on how their voting system should work, now once more, how are they going to deal with ties in the voting process for deciding the rules of the voting process? Well, so they will vote on the rules of the voting process of the rules of the voting process. And so one, till they end up with an infinite loop of votings for putting rules for votings. So, they have at some point to decide on some rules of the democratic process in an undemocratic way. And this is what I mean by saying that some aspects of the democracy are undemocratic, and this is where we should push on having a better democratic process, and not one that favours some, or at least this is where we shouldn't leave our opponents put their rules, while saying stuff like "we aren't going to react since we have complete faith in voters choices"!  

Wednesday, January 4, 2012

What happens when a country defaults on its debt?

I was wondering what happens when a country defaults on its debt? So, after searching I found this discussion on Reddit and would like to share a comment made by a user called @Hapax_Legoman here.
First, a little bit of background.

Say you have a little country of your own, off on an island someplace. You and a few hundred friends, let's say it is. You have a government — monarchy, republic, whatever; doesn't matter. That government has a treasury, but the treasury has no money in it. Which is fine … so long as you don't actually want your government to do anything. If you just want to be able to say you have a government, knock yourself out; nobody can stop you. But as soon as you want that government to do stuff — like hiring police officers, or raising an army — you need money in your treasury.

The way this works is simple: Your treasury issues bonds. A bond is sort of like a very ritualized type of loan. You sell bonds with the promise to, after a set amount of time, buy them back for more than what you sold them for. So say you could sell a bond for $100, with the promise to buy it back in a year for $110. The difference between how much you promise to buy the bond back for and how much it sells for, expressed as a percentage, is called the interest, and the date on which you promise to buy it back is called the maturity.

Who buys bonds? Who cares? Literally anybody with money can buy these bonds. Maybe those are private citizens in your country, maybe it's your central bank (that's how you create money in your economy in the first place), or maybe it's private citizens or other concerns in other countries. Point is, you offer the bonds for sale, and people agree to buy them. Thus do you get money in your treasury.

Of course, people will only agree to buy your treasury's bonds if they think there's a good chance your treasury will buy them back when it promises to. If there's reason to doubt your treasury's willingness or ability to buy the bonds back, the people who have the money to buy them will demand a higher rate of interest to justify the higher risk.

If there's a lot of reason to doubt your treasury's willingness or ability to pay, potential bond buyers might demand an impossibly high interest rate, making it effectively impossible for you to sell bonds, which in turn means it's effectively impossible for you to fund your government's activities.

When one of those government activities you can no longer fund is redeeming previously issued bonds, you've got yourself a sovereign debt crisis. And when a debt crisis gets really bad, you've got yourself a sovereign default situation.

So your question is what happens in a sovereign default situation? Well, most of the time the answer is that doesn't come up, because people, on the whole, aren't complete idiots. You can see a sovereign default situation coming from a mile away. When confidence in your bonds drops, and the demand price rises as a result, it's clear that you're going to have a problem in the future if you don't take measures to prevent it. So people, as a rule, tend to have plenty of chances to see these things coming and avert them.

But sometimes that doesn't happen. (In the case of Greece, it didn't play out that way because there was a big disconnect between the perceived value of Greek sovereign bonds and their actual value, due to what we could charitably call reporting irregularities. When that disconnect was resolved, the market value of Greek sovereign bonds dropped like a rock practically overnight.) In those cases — where a sovereign default situation occurs anyway — one of two things can happen.

Most of the time, you end up with what's called a controlled default. This includes two parts: a restructuring of the sovereign debt, and a guarantor.

In the broadest terms, sovereign debt restructuring just means rearranging things to reduce the debt burden on the treasury in question. That might mean getting holders of bonds to agree to new terms of repayment, or it might mean somebody buying up a bunch of bonds on the open market and then destroying them, whatever. It's usually very complicated, but the general principle is that the country's sovereign debt obligation is changed to reduce the scope of the problem and increase the chance that the holders of those bonds will get at least some return on their investment.

A guarantor, on the other hand, is some body that injects capital into the treasury to cover bond repayments. In the modern era, that's usually the International Monetary Fund, or IMF. The IMF functions much like an insurance underwriter: Countries pay into the fund as they can, and in return receive the right to draw on the fund if needed. In a sovereign default situation, the IMF will extend loans to the troubled treasury — usually loans with lots of very short strings attached — to guarantee the treasury retains the ability to redeem its outstanding bonds as it recovers from its debt crisis. Having a guarantor is good, because it raises market confidence in your ability and willingness to buy back new bonds, meaning you can get money flowing through your treasury again, which is how you climb out of a debt crisis.

But remember I said that only happens — the thing with the restructuring and the guarantor — most of the time. It's also entirely possible for a government to just say "screw it, we ain't payin'." When that happens — and it's worth remembering that in the modern era it's exceedingly rare — the people who hold those bonds just take it in the shorts. The bonds become absolutely, literally worthless; you're better off burning them to heat your house than you are holding on to them in the hope of future repayment.

Of course, the failure of a government to buy back its bonds doesn't just render those bonds worthless. It renders all future bonds issued by the same treasury worthless. Because once a government exercises its power — and it is a power; nobody can stop it from happening — to nullify its bonds, what's to stop it from using that power again the next time a series of bonds matures? Nothing, is the answer. So once a government has demonstrated its willingness to say "screw you" to investors, faith in that government is ruined forever. Meaning that government can no longer fund its operations, meaning it can no longer do anything, meaning it no longer has any reason to exist, as far as its people are concerned. That's how you end up with things like the fall of the Weimar Republic … which is precisely why today we have this vast infrastructure in place to keep things from getting to that point.