With enemies like these

 

With enemies like these

• The EU has frozen Russian assets in Belgium permanently, with a view to use those as guarantee for loans to Ukraine in order to fund the continuation of hostilities and perhaps a more favourable outcome for Ukraine.

• The EU has decided to use art. 122 to circumvent the need to obtain unanimity on the EU commission decision to permanently freeze Russian assets already frozen , in custody in Belgium through Euroclear;

• There is objectively a wide gulf between what the official text of the article says and both the reasons and the purpose for which it has been applied in this case;

• Russia apparently has already filed a suit against Euroclear in a Russian court;

• The amount in question is approximately 50% of Belgium's GDP;

• No formal guarantees to Belgium by other EU countries has been finalized previous to the decision.

• A leaders' summit is due on December 18^th, where some of these issues will have to be discussed, on top of event occurred between now and then.

DISCLAIMER: None of the content is to be considered "financial advice" under any interpretation of the law. These opinions are mine and mine alone. Consult your own professional, do your homework, exercise regularly.

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Few people in Europe know what Euroclear is. I am a  former fund manager and now financial consultant to individuals, and as far as lay savers are concerned, all financial instruments they have are deposited in some electronic form with the bank or financial institution where they hold their money and investments in custody.

In reality, that's never been the case since financial instruments became dematerialized decades ago. The generation previous to mine still could and occasionally did hold physical government bonds at home, and literally cut off the coupon like an housewife obsessed on supermarket discounts, and go to the local branch of the central bank to collect. In cash, of course.

My generation has at best seen the tail end of that, if at all, and I am 63 years old. But the fact that a contract or an instrument is in electronic form doesn't mean that there is no depository institution, keeping the ledger of holders etc.

Euroclear, akin to the formal title of Nebuchadnezzar II of Babylon, is the “bank of banks” as he was King of Kings: if you happen to own what is commonly known as a “Eurobond”, its global certificate is deposited by the issuer in Euroclear, who keeps the ledger reporting which of the world banks has how much nominal of the issue, distributes coupon payments accordingly, and acts as go between for official information flow between the issuer and the banks. By this point, you might realize that apart from scale, impartiality is the other requirement of such an institution. It is a bank, subject to law, yet it is also something different... and central to how the European financial system works.

This impartiality is necessary because it impacts the  attractiveness of the whole financial system, locally and globally. 

There is an almost endless tradition for sovereign immunity, because this, like the diplomatic immunity for envoys and diplomats and the legal status of Embassy grounds, is firmly grounded not as much in texts as much as in history: retaliation, almost invariably on a bigger scale and often quite cruel, has been the order of the day since the beginning of recorded history. On the bright side, this brings a ray of hope because even the cruelest of historical societies quickly came to the identical conclusion independently and if not always quite respectful of the principle, they were rational enough to fully expect retaliatory measures. In this case, as in others, the EU doesn't seem to have wargamed this, and/or learned that you really need a Red Team, staff it with your best minds, and allow it to brutally kick you when you make a mistake.

Also, Article 21 of the United Nations Convention on Jurisdictional Immunities of States and Their Property (2004) exempts Central Bank assets held abroad specifically... But that's still a part of the general immunities accorded between sovereign states. Just to name a possible snag, what additional instructions have been given to EU embassies in Moscow pertaining the destruction of codes and other sensitive material in case of trespassing?

Yet, this is something outside EU's control, and most importantly outside the control of its citizens. But this is important since even if the EU tried to shroud it in legalese, this IS a major breach of international and domestic rules. 

Think about this scenario, impossible as it seems and is. Monday morning, in a major run on liquid assets to sell to bring the proceeds out of the EU, Government yields in the Eurozone rise to 5% on ten year bonds from 2,82% on German securities. The "safest" long asset in the EU loses over 15% on opening, and the rest lose proportionately more. Would I have a problem finding a credible explanation why? Heck no, piece of cake. Once you start bending the law to your wishes, we're in the Matrix and a child with a shaved head tells you that "There is no spoon". And bent it was alright, see the text of Art.122:

[link]

Remember, as much as one may think the Ukraine war is important for Europe, Ukraine is not a Member, so the rationale of "solidarity among the Member States" doesn't hold much water. Ditto for the "Natural disasters or exceptional occurrences beyond its control" and "Financial assistance to the Member State" [note the use of the singular].

Ironically, had the measure to impose the indeterminate time freeze on Russian Assets deposited in Euroclear passed with the required unanimity, the guarantees  Belgium requested in order to go along with the scheme would have been more adherent to the article: in that case, the rest would have helped ONE single Member State, hit by a (un)natural disaster. But I am not a lawyer, soooo...

In any case, going back to one of my tweets on the subject:

 Property rights are property rights. The EU has just stated, in no uncertain terms:

1. That those rights are conditional (no argument there, "eminent domain" and other examples);
2. That politics and not law define the applicable scope of terms like "emergency";
3. That there's no due process and hurdles to finicky and quite personal interpretation of the law;
4. Lastly and most importantly.... that they are willing to go to great lengths to get at what they consider "free money".

Yet, while as I said "not advice" etc., it's almost impossible to make a case for this measure to impact favorably on unbiased investors' assessment of investments in the European Union. Especially because shrewder eyes will immediately see this for what it is, an admission that the EU has financial priorities it's not willing to give up in order to save Ukraine, be they climate measures, transportation modes, social spending etc.

This would, all else being equal, cause a permanent elevation of returns requested by lay savers in order to make them part with their money..... willingly. Read this as "higher rates".

On top of that, since we're talking about meddling with international custody relations, there will be people and/or institutions who will try to get "outside help", in terms of capital flight, or, and this is one of  the scenarios, in term of having different hurdle rates of return in Europe in proportion to the amount of political clout a country has in the EU,  with China being the most favored (it basically can destroy Europe using sanctions on strategic supplies), and the US being relatively disfavored, because that leverage is not as big.

Couple that with the half said deadline of 2027 imposed by Trump on Europe taking on more responsibility for its own defense, and thing may become more interesting quite fast. Stay nimble.

 

EDIT: Link to the official measure