Sovereign risk and regime uncertainty

Sovereign risk is the risk that government policy might adversely affect the value of private investment or private property. In recent years, however, sovereign risk has come the mean the probability of government default on public debt. The government and its supporters rely on that narrow definition but, to be fair, it is that latter definition that most people would have encountered in their studies. So we see this type of article in the Fairfax press:

BlackRock is one of the world’s most important buyers of government bonds, investing $US3.7 trillion worldwide. It says Australia’s carbon tax and the mining tax have had at most a “marginal” impact on perceptions of the country’s risk. More important has been the government’s success in shrinking its budget deficit.

The finding is at odds with a claim made by federal Coalition Treasury spokesman Joe Hockey last August that Labor was “adversely impacting Australia’s sovereign risk profile”.

To be clear – BlackRock’s paper investment in Australia is very safe. I doubt the federal government will defaut on its debt.

If BlackRock, however, were a mining company making real investment in Australia they might have had a very different view – especially in 2010. Just last year the government expropriated the property of tobacco companies and the Australian constitution was too weak to prevent that. This morning we read that other private property isn’t safe either:

Mr Sinclair said there was ”something inherently not right” in having Coca-Cola and Powerade sponsor events like school rugby and junior soccer, and it was a matter of time before tobacco-style bans on direct marketing to children were introduced for unhealthy food.

International investors have become increasingly aware that their property might not be safe within Australia – it is protected by convention and not the constitution. The takings clause is weak – the government can argue that while it is not taking your property for itself it can prevent you from using it. This is an argument that appeals to lawyers but not investors. So the perceived risk of public policy changes destroying investments and property has increased under this government – what an incoming government will do to reduce that risk is unclear. But that is another story.

In the meantime, to avoid confusion perhaps the term ‘regime uncertainty‘ should be substituted for sovereign risk when discussing real investment and not financial investment.

Regime uncertainty is a concept developed by Robert Higgs, that describes a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights.

Investment not only entails ‘irreversibilities’ or sunk costs, but can be delayed. Investment spending may be highly sensitive to risk in various forms, including uncertainty over future tax and regulatory policy. A major cost of political and economic instability may be its depressing effect on investment.
This uncertainty can arise from many sources, ranging from simple tax-rate increases to the imposition of new kinds of taxes to outright confiscation of private property. Threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. The security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.

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30 Responses to Sovereign risk and regime uncertainty

  1. Judith Sloan

    Normally BlackRock would be portrayed by Fairfax as a US – and you know what the Fairfax view of the US is – money-grabbing, rapacious financial intermediary focused on serving its shareholders and skinning its clients and which were responsible for the GFC.

    But when BlackRock praised the Australian government, all this if forgotten.

  2. Johno

    The Love media is becoming increasingly shameless in its support for the Greens Party/ALP alliance. Sarah Clarke’s week long climate change propaganda project on the ABC being the latest example.

  3. CameronH

    The statement “What an incoming government will do to reduce that risk is unclear”. I believe that it is very clear. They will do nothing. No conservative government has ever reversed the madness that was introduced by a preceding socialist Labor government so why would any body think the future will be different.

    I have read somewhere a statement that goes something like: Progressive spend their time in government making as many mistakes as they possibly can while Conservative spend their time in government correcting as few of those mistakes as they possibly can.

  4. Infidel Tiger

    Mr Sinclair said there was ”something inherently not right” in having Coca-Cola and Powerade sponsor events like school rugby and junior soccer, and it was a matter of time before tobacco-style bans on direct marketing to children were introduced for unhealthy food.

    Getting rid of tobacco advertising worked a treat for sporting clubs. Quit (taxpayers) had to take up all the slack.

    This country is a festering stinkhole of depraved perverts who want to stick their beaks in everybody elses lives.

    It’s become a rather terrible place to live.

  5. Lloyd

    Sorry for being a word Nazi but the first sentence should read “adversely affect” rather than “effect”.

    [If you say so. Sinc]

  6. H B Bear

    Ask a NT, WA or Queensland pastoralist what they think of Australia’s sovereign risk.

  7. entropy


    Sorry for being a word Nazi but the first sentence should read “adversely affect” rather than “effect”.

    does that count as Godwin’s Law? :)

    Not even ten posts in.

    Back on topic. For some reason I read this post as quoting an AFR article misunderstanding sovereign risk. I was feeling quite gobsmacked until I clicked on the link and discovered it was The Guardian on the Yarra.

  8. Infidel Tiger

    Everybody I know in the small cap mining industry is doing all their business in Africa and Eastern Europe. Australia is not even on the radar.

  9. JC

    Everybody I know in the small cap mining industry is doing all their business in Africa and Eastern Europe. Australia is not even on the radar.

    That’s what a i keep hearing too. Some of the government there offer zero tax deals too and you’re able to cover the risk of getting the mine stolen through various insurance and other measures too.

    Beats this shithole.

  10. JC

    Eco-tourism IT. That’s the growth industry. Eco-tourism. LOl

  11. Infidel Tiger

    Africa is a much easier place to do business than Australia. They go out of their way to help. Eastern Europe is a bit tricky because everyone of those bastards is mafia or a grifter or a whore.

  12. Infidel Tiger

    Eco-tourism IT. That’s the growth industry. Eco-tourism. LOl

    Yeah, that’s right.

    The $40 billion James Price Point gas project is about to abandoned and instead we’ll make that money back in whale watching and bush tucker cooking demonstrations.

  13. JC

    Hungarian women are the best natural looking women in the world. I hear they were the most expensive hookers in Europe.

  14. JC

    Seriously though, buy and African fund and hold it for 20 years as a decent slab of that place is really going to industrialize. There will be fits and starts but some of them are on their way.

    Everyone talks about China, India etc but forger that selectively some African countries are growing at 10% per year without much effort.

  15. m0nty

    International investors have become increasingly aware that their property might not be safe within Australia – it is protected by convention and not the constitution. The takings clause is weak – the government can argue that while it is not taking your property for itself it can prevent you from using it. This is an argument that appeals to lawyers but not investors. So the perceived risk of public policy changes destroying investments and property has increased under this government – what an incoming government will do to reduce that risk is unclear.

    So your argument is that investors prefer investing in countries which do not enforce laws protecting their citizens from harm, economic or social. Makes sense from their perspective. But I don’t think it prudent for any Western country to lower their standards to become the new Latvia or Zimbabwe.

  16. Infidel Tiger

    But I don’t think it prudent for any Western country to lower their standards to become the new Latvia or Zimbabwe.

    Latvia is a great place.

    Zimbabwe is a leftist shithole, but Zambia is a go ahead country.

  17. JC

    So your argument is that investors prefer investing in countries which do not enforce laws protecting their citizens from harm, economic or social.

    You moron. The mining tax, highly punishing EPA requirements aren’t there to protect citizens. They are imposed because the current clowns are a bunch of Marxist trogs and hags sucking up to the greenslime.

    Some of these African countries want to see their living standards improve… perhaps in time some of their citizens would be able to swallow 36 Dunkins in a sitting…

    Makes sense from their perspective. But I don’t think it prudent for any Western country to lower their standards to become the new Latvia or Zimbabwe.

    No one is suggesting that, dickhead. And in any event we do have a government that more or less resembles Zimbabwe’s anyway. All the slapper needs is a ring in her nose.

  18. m0nty

    Latvia is a great place.

    Latvia just went through the equivalent of the Great Depression, with 10% of workers emigrating. One in six is still unemployed, and they won’t reach their pre-GFC GDP for another ten years. Yeah, great place IT.

  19. JC

    Latvia just went through the equivalent of the Great Depression, with 10% of workers emigrating. One in six is still unemployed, and they won’t reach their pre-GFC GDP for another ten years. Yeah, great place IT.

    Bullshit. You’re lying as usual, Monster. It’s actually recovering nicely.

    two points.

    No one has been able to outlaw serious recessions.

    You failed 1st year Monash economics, so you ought to be the last person talking about this stuff.

    Go away and troll somewhere else you cry baby.

  20. Bruce

    m0nty – You should this article from a few days ago on Bloomberg, which is owned by one of your heroes.

    Why Austerity Works and Stimulus Doesn’t

    The starkest contrasts are Latvia and Greece, two small countries hit the worst by the crisis. They have pursued different policies, Latvia strict austerity, and Greece late and limited austerity.

    Yet Latvia’s economy grew by 5.5 percent in 2011, and in 2012 it probably expanded by 5.3 percent, the highest growth in Europe, with a budget deficit of only 1.5 percent of GDP. Meanwhile, Greece will suffer from at least seven meager years, having endured five years of recession already. So far, its GDP has fallen by 18 percent. In 2008 and 2009, the financial crisis actually looked far worse in Latvia than Greece, but then they chose opposite policies. The lessons are clear.

    Zee truth hurts m0nty, doesn’t it?

  21. Skuter

    It appears as though m0nty has infused LSD into his 30lbs/day of mashed donut paste that he consumes through a gavage.

  22. Sinclair Davidson

    Noticed how m0nty changed the subject?

  23. Bruce

    Apologies Sinc. I am addicted to flame-fried troll.

    I was going to say the mining companies have almost certainly inceased the sov risk component (which used to be very low for Oz) in their corporate WACC’s, but you have to be a spreadsheet jockey to understand why that is important.

  24. Bull Market

    According to its fact sheet BlackRock is a Bond Fund manager for professional investors. And that means the money it holds is hot. So hot it can leave at a day’s notice, of course only after being marked to market, which is better than the redeemability of Bonds it holds. Investors assume risk and as BlackRock Funds pass theirs on to its fund holders it cannot be considered an investor any more than LTCB could have been considered an investor despite the fact, like BlackRock, it bought and sold many bonds and their derivations before it went bust for getting the market so wrong. It’s a sure bet that like LTCB the speculators who do all that trading for BlackRock are nowhere near as smart as they think they are either.

  25. J.H.

    Regime uncertainty…. Yep very succinct and clear term for business atmosphere in present day Australia.

    Even Australian citizens have no certainty with this regime. As a land owner, you have no certainty, no real right to use that land which you own to create a livelihood. You must bow to the regime to use your own property.

    The Maxwell Szulc case in WA in which an Australian farmer/land owner is being jailed for 15 months for daring to clear firebreaks on his land… Read JoNova’s site for the details.

    … Yep. Regime explains it nicely. Labor’s Australian Regime….. They’re probably quite proud of it you know….

  26. MattR

    But I don’t think it prudent for any Western country to lower their standards to become the new Latvia or Zimbabwe.

    You mean the Latvia that despite seeing some big drops during the GFC, has consistently grown over the last 3 years?

    You also mean the communist basket case called Zimbabwe? I’d say ALP policies aren’t that far from Mugabe already. Not quite there completely but it really doesn’t take much to go from functioning, wealth and freedom creating, free-market to socialist ‘utopia’.

  27. John Mc

    International investors have become increasingly aware that their property might not be safe within Australia – it is protected by convention and not the constitution.

    Just about everything protected by the law in Australia is protected by convention and not the constitution, right down to freedom of speech (yeah, yeah, we have some pissweak High Court ruling partially upholding an inalienable right. Wow.) The only thing the Australian constitution gives you, other than pretty much freedom of religion, is an election every few years.

  28. J.H.

    m0nty

    17 Jan 13 at 12:16 pm
    “So your argument is that investors prefer investing in countries which do not enforce laws protecting their citizens from harm, economic or social. Makes sense from their perspective. But I don’t think it prudent for any Western country to lower their standards to become the new Latvia or Zimbabwe.”

    … Er, I don’t think that is Davidson’s argument at all… You just made that one up yourself.

    Anyway, be that is it may, we will continue. How can a digging up a resource “harm” anyone M0nty?….. A one square kilometer hole in the ground on a 7,682,300 sq km continent?

    Explain this “harm” in which people suffer.

    ….If they never dig up a resource, they never benefit from it. So if someone else digs it up….. Where is the harm to them?

    If this someone else digs it up and the benefit is to the economy….. Where is the harm to “the people”?

    If “the people” dig it up for themselves and benefit…. Where is the harm.

    Show me the fukin’ harm M0nty. Because I’m damned if I can see it.

  29. Hubert East

    Me likewise J.H.
    I dammed if I know what m0nty is banging on about from his m0ntopia under a rock somewhere!

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