[Where: Greece gets a deal, the BOE replaces King with Canada, Goldman now owns the world, and Warren Buffett gets his ridicule on]

Good morning

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The headlines:

  1. The Greek deal.

    Link: relief.

    Finally finally. The Greeks get a deal. And the EU folk are calling it “a formula”.

    The basics: lower rates on bailout loans; suspension of interest repayments for a decade; extension of loan maturities; a bond-buyback program; and the clearing of the next instalment.

    But no debt relief. Which isn’t surprising, but it is a bit unfortunate: as I wrote last week, a program of debt relief seems the most sensible decision because it could be used to incentivise Greece’s structural reforms. And the “contructive ambiguity” of the new deal basically allows for the future possibility of debt relief – so it looks like the Eurozone is headed in that direction anyway. It’s quite frustrating that political sensibilities prevent these steps from being taken upfront.

    But to end this on an encouraging note – the payment of future aid instalments has been linked to Greece meeting her economic reform pledges. In all honesty – I’m surprised that this wasn’t done in the first place. Rather than this loose “do what you can and we’ll see if that’s enough” principle.

  2. The King is dead.

    Link: long live Canada.

    BOE Governor Mervyn King is to be replaced by Bank of Canada Governor Mark Carney, who is apparently untouched by any Libor scandal.

    Mr Carney is a former Goldman Sachs managing director. Which I think makes Goldman Sachs the most important institution in Europe:

    The Bank of England being run by a Canadian. My my.

  3. Mr Buffett is back on taxes.

    Link: ridiculing.

    Grover Norquist has been attracting all kinds of “Roll grOver” pun headlines this week, after telling everyone that high taxes on the rich discourage investment.

    Warren Buffett has taken over the driving reins on that wagon by writing this in a column:

    “Let’s forget about the rich and ultra-rich going on strike and stuffing their ample funds under their mattresses if – gasp – capital gains rates and ordinary income rates are increased. Only in Grover Norquist’s imagination does such a response exist.”

    Does B-dawg make sense? Well given that he was investing in a time before Reagan when tax rates were much higher than they are now (such as a marginal tax rate of 70% versus today’s 39% or whatever)… I’d say his is the voice of experience.

    I think that we can sometimes overstate the importance of tax in the decision-making process. The way it gets discussed – you would think that tax can turn a profit into loss. That’s just not true – if you make a profit, that tax will reduce how much of the profit you take home. If you make a loss, then you don’t pay tax.

    On the other hand, the real basis of the argument is saying that if you can make more money somewhere else, then you’ll invest somewhere else. And does that really sounds so far from the truth? We live in a different world to the 1960s and 1970s, with an important difference being freedom from capital controls. That is: if the tax rate in the US makes your profits in the US lower than in, say, the Cayman Islands… Then, you’ll just take your money to the Caymans.

    After some more thought, I believe Mr Buffett’s point is this: in practical terms, you can’t spend profits – you can only spend cash. And it makes sense that most people will invest in cash-flow generating investments wherever they need their cash-flows (ie. where they live). And paying a little more tax will mean that they need to invest a bit more to generate more cash flow.

    There are too many arguments that make sense. The best answer here is to test the waters empirically. What are the chances?

That’s all for now.

Have a good day.