The lie of Risk Premium

Each issue of sovereign debt, state decides interest that it will be issued, it will put on sale and them the fraction that will not be covered, will be sold in an auction. The auction set how much interest will be returned the part sold at auction, the rate of overinterest of sovereign debt in relation to lower of all sovereign debt is the risk premium. His name is because it is considered that this overinterest is the profit needed to cover the increased risk of non-payment at term respect that has the lowest interest that is considered of minimal risk. This is not new, in the seventeenth century soldiers recruited by the kings of Spain were better paid than those recruited by the French king. The reason was that most soldiers were recruited in the border territories, of course volatility borders in the period that potential soldiers did no matter to be recruited as an army with one another, in the seventeenth century the army Hispanics never won a battle, it gave very little survival rate (the battles of the time were wearing so who lost the battle, lost many soldiers) and a few looting (the other source of income for soldiers time was the looting of conquered), so it was convenient to enlist with France, the effective way to attract Hispanics was exercised with a higher salary to the soldiers. Finally in both cases is to pay more and assume a higher chance of losing everything. But really this is the case.

Who lives of risks are insurance companies. These lay the premiums as follows: Suppose that claims with cars to third of last year have represented at 10% of the total number of vehicles insured with a medium amount of 600 € by claim, so the company only has to multiply 6x600 and pass it for 100 vehicles giving a total of 60 €, now it loads the overhead costs such as advertising, management, premiums, salaries to executives... and we charge a profit of 10%, and we have the share to pay  of compulsory insurance on our car (the numbers are totally invented why I have not bothered to check them, I might get me angry to do it). The system is based on always playing against the less likely. Insurance companies, casinos or the lottery, have most of the numbers in each game and they could lose a game but they play as often those almost always end up winning. The sinking of the Costa Concordia will represent the insurer a high outlay of money, but there are many ships sailing the sea coming to a successful and they have paid their fees, at the end of the 60 € fee are the pay the claims.

But the risk premium is also set like this? NO. First it doesn't know what probability  has a state not payment, and second it's an auction and he won the highest bidder. States had done historically suspension of payment of claims, but unlike of car insurance, many vehicles are in circulation and for a long time; only some states and sometime had done failure once, and we can't establish parallels temporary (not is the same as the eighteenth, the twentieth or the third century BC) or of size and location (Argentina and Liechtenstein). On the other hand auctions make this price rise and lower constantly stating clearly has no connection with the real chance of recovery, a state is a very large and has very inertia; and if today you can’t pay the expiration of next year, however much things will change next month it will not do.

What sense does it make money, although they have sold it very expensive, if you know that you don't cash? If the credit was an installment or it leaves a pledge, they can recover part of the investment otherwise it is a gamble with pyrrhic gains; but a state that pays principal and interest at maturity, and warranty ... who ask creditors to the Argentine state what does the guarantee of the state mean. So if they leave money to a state, they are believing that this will end up paying. And if you increase the interest grows the likelihood that you remain unpaid, it is easier to pay a small debt that a greater one.

It really shows the interest is the degree of desperation of the states. Currently, states do not get into debt to invest in the country but to maintain current expenses. When this happens in a family it is the first step to sleep under cardboard. The credit uses to pay the extraordinary, and in a state that is compressible to keep the floating debt has investment grade, but the debt that currently serves contracts to pay previous debt and pay current expenses.

As states have come to this? In the same way that those who do not know to use a weapon ends up shooting a shot in the foot. The macroeconomists after making us enjoyed the years '80 with stratospheric interest supposedly to stop inflation (presumably because inflation was rampant in '80) suddenly at '90 they decide to the contrary. And this works so well that they fall interest below inflation. If the interest is below the inflation, save money is losing money and particular stops to  save money, and not only that, when they will leave the money under inflation even you earn money to borrow you so particulars get into debt. And what do states do to repair it? Nothing they had added to the party and the last closed lamp. A virtue of savings is the possibility of deal with unforeseen events, so when things go wrong you can use them, but states and homes burned savings before inflation will eat them, therefore only they can borrow more. The debts must be paid and if you get into debt you arrive a time when you don't win enough to pay what you owe, this is the degree to which states are at this time. The absence of vision and believe their own lies has taken to get the rope to the neck having to borrow money to pay the borrowed previously.

In normal states issued debt, and they withdrew the portion not covered. On the other hand when they were desperate, they turn to their national banks to cover the emission without touching the interest in exchange for favors. But this practice can’t be done at this time when banks have enough work for their debt provisions and their clients with them. This leaves the states at the foot of the vultures of the economy: the speculators.

And in the midst of the feast we find the rating agencies. These are supposed to do all kinds of modeling and calculations to determine the creditworthiness of companies and organizations. I do not know if they open a goat and you look like the viscera were the Etruscans, or climb on the roof of the skyscraper where they have offices, wet their finger and watch where the wind blow, now I do not know how many A capital was Lehman Brothers day before of its bankruptcy, and it isn't necessary to say anything more. But they still emit opinions, as the Pope of Rome they bless and excommunicate Urbi et Orbi, and anointed with sacred oils emit their oracles. In the world of finance where information is gold, the reports go to their clients are confidential, but for a strange reason and altruistic, they warn and inform investors of the world who do not have this information, and this are free and against those who were paying they, to cut the possible business thanks to this insiders who have paid.

That would be to naive people to think that the Rating agencies were against their clients, so that broadcast messages have a purpose: it retracts to potential investors who could buy debt and it leaves open the field to speculators. As subhasters* to hunt the best price and this is achieved by eliminating competition. In the auction houses, vehicles and factories eliminate theirs competition through threats or bribes after they are buying goods far below their real value. These subhasters of debt use the Rating reports to eliminate the competition and they set out conditions of usury (the Medieval time for much less than the usurers were burned).

Two years ago we are seeing the complete immolations of states and collective sacrifices, to appease the hunger of this last dragon named Market. When more sea has more it bray; but St. George isn't here and they don't await him. But all gesture is useless, that marks the damn risk premium is not the economy, but the greed of a few. They could stop the feet of speculators if the economists and politicians don't do the game to they, but economists and politicians do it with a supposed defense of the free market, which as I stated it does not have anything of free. All the rules to favor speculators and against the rest have ours hands tied. The biggest shame is the rights that have cost time and blood are thrown as meat to the Beast with the excuse of the crisis. Another politics is possible but the bad faith of somebody, ignorance of others and look away many of us are leading again to the time of slavery.

* in catalan: professionals of auctions of proprieties seized for debt.