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Brexit: Political Sovereignty or Economic Prosperity

The United Kingdom left the European Union entering the year 2020. The country subsequently entered a transition period in which they would continue to have access to the Single Market, allowing unfettered trade access, and the other benefits of EU membership such as free movement of people for the duration of the period. A free trade deal was finally struck on the 24th December (the figurative 11th hour) when the UK would have crashed out of the temporary continued trading measures with no deal whatsoever.

However, this deal has come under a great deal of scrutiny, particularly by industries that were significant advocates of Brexit, specifically the taking back of control of rules and regulations governing practices in the United Kingdom. The taking back of sovereignty if you will. But it is ever clearer the trend over the past number of years toward nationalist sentiment, a degree of introversion, is working against what is likely of more importance moving forward.

It has been reported in the past week that the new customs checks that traders or hauliers must go through in order to trade with the EU has led to many companies refusing to either deliver or export to or from the EU. This is due to increases in costs caused by delays and the required documentation in order to successfully transport goods without the potential refusal of entry or in some cases destruction of some product. Of course these delays are detrimental to time constrained goods, such as fish and seafood. The longer left the more likely these goods in particular will expire. Even in the dead of winter as we are currently (at the time of writing).

Subsequently this led to protests amongst fishermen and demonstrations made against government to help due to £1000s worth of product having to be disposed of. Interestingly though fishing in itself was an industry that advocated Brexit for the reasoning of being able to take back control of British waters, of sovereignty over British waters allowing the upping of fishing quotas and therefore revenues generated. In the short term, however, since this change in quota is being implemented over a number of years, these fishermen are met with a new environment of not being able to compete effectively with their European counterparts due to the inevitable restrictions they called for in Brexit. Many fishermen may fall into financial ruin as a consequence even if these issues in trade can be ironed out in the medium term.

But what then does this have to do with political sovereignty and economic prosperity? It could be argued that the idea of a standalone political sovereignty, one tied to a sole nation state is non-existent in the 21st century. Over the course of the 20th century increasing globalisation has eroded nation states to the point of being second in power and reach to multilateral institutions such as the EU or NATO. Even if a nation state, such as the UK, was to remove jurisdiction of a higher governmental institution such as the EU, as it has, it still succumbs to the international order of things. In practice, the taking back of political sovereignty, of apparent self-determination sounds attractive, synonymous with freedom in individualistic and liberal democracies such as the UK and the US. Nonetheless, the reality is self-determination in today’s world requires bi-lateral and multi-lateral co-operation.

These fishermen may have the rights in the long term (if successful in weathering the current impacts being had on the UK industry as a whole) to fish more, but the reality is they need the multi-lateral cooperation of their government of which they believe instils their political sovereignty. Without the effective economic co-operation and therefore giving away of “sovereignty” to other nation states, the individual, the introverting nation state, must sacrifice economic prosperity. Obviously, this is if the individual or nation state is willing to do so then so be it.

Though it can be argued that the loss of economic prosperity is in itself a loss of political sovereignty. The loss of the trading relationship, the complete freedom of movement of goods, means these fishermen cannot do what they want because their product can be replaced, their trading relationship found elsewhere. Nation states move backwards in decisions like Brexit, the rights the British people have lost both economically and politically have proven true in the loss of ease of trade, business and competitive edge. The British are subject to less opportunity, less prosperity, and thus less executable rights with less wealth of which they could have used to insure their rights, better opportunity and sustain prosperity.

by Maurizio J Liberante

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LIBOR Transition and the Introduction of “Risk-Free” Rates

During the Great Recession starting in 2008, financial products known as collateralised debt obligations (CDOs) are considered to be blame for the worst recession since the Great Depression of the 1930s. These CDOs, specifically a type of derivation (a financial product deriving its value from underlying assets) were increasingly being based on baskets of mortgages. The runaway ever-increasing pricing of property due to the exponential demand for particularly housing coupled with the hunger for CDOs created an endless demand and supply loops: demand of housing, increasing prices, additional requests for mortgages, supply of mortgages, creation of more CDOs, demand for mortgages, dropping of standards to obtain mortgage, thus increasing demand of housing.

Unbeknownst to many, although mentioned here and there by players in the banking and financial industries, including through the media, there was an additional underlying potential aggravation as to the eventual collapse of markets: LIBOR. The London Interbank Offering Rate (LIBOR) was a measure of the interbank cost in terms of interest of lending money to one another usually in a specified period (e.g. overnight, 1 month, 3 months, etc.). Traditionally a panel of banks would self-report this rate to the British Banking Association (BBA), an independent body, of which an average was taken and published every day at 11am. The reported rates were effectively estimates of expectations often loosely and not categorically based on bank’s perceptions of market conditions. Of course, this led to many years of manipulation of said rates by individual banks, attempting to impact the published rate of LIBOR underlying trillions of dollars worth of even consumer based financial products such as variable rate mortgages. Very often, those that were given authority of reporting to the BBA within banks were closely associated or directly involved in trades, providing a great deal of incentive to move LIBOR in their favour even by as little as a basis point (0.01%). This manipulation extended to collusion amongst traders and teams across multiple banks and brokerages with management in many cases knowing of this behaviour, but otherwise ignoring it.

After a significant investigation was conducted on both sides of the Atlantic by numerous US and UK government agencies, arrests were eventually made. Oversight of LIBOR was handed to UK financial regulators to ensure integrity and reliability moving forward. It was recommended that from 2012 that the panel of banks reporting rates should do so based on sets of recorded transactions, and with the publication of individual bank’s rates submissions every three months. More recently it has been decided that LIBOR should be replaced altogether with what the Bank of England has termed risk free rates (RFRs). One of these is the Sterling Overnight Interbank Average Rate (SONIA). This currently exists and is the effective interest rate charged overnight on unsecured transactions in Sterling (the equivalent being SOFR in the US overseen by the NY Federal Reserve).

SONIA is a weighted average of a previous day’s overnight Sterling transactions and is published daily. The other rates likely to be picked up in the EU and the US follow similar calculations. However, after all the realisation, scrutiny and subsequent criminal conviction surrounding LIBOR it seems somewhat ironic that a replacement rate categorised as being “risk free” are being used. Intrinsically it could be argued that no rate is without risk, especially when again like LIBOR, in effect, these “risk free” rates, speaking particularly of SONIA, are subject to the rates the banks themselves set on their own transactions with one another. In saying this, there is of course an inherent reduction in potential risk of blatant making up of rates entirely due to those being set and therefore fed into SONIA being used in the past to affect real transactions. But to imply then that banks or financial institutions could not on a subtle level (e.g. a basis point of movement) affect overall averages of SONIA through their own decisiveness of transactional interest rates seems far fetched. Continued trust of these behemoths of complex, profit driven, financial networks may be detrimental to much more than these networks themselves which was seen in the Great Recession. This is not to say that outright distrust is warranted, or there is an existing or otherwise interest rate calculation that does more to drive home or enforce integrity. However, using one that fundamentally appears vulnerable to similar nefarious activity seems counter productive.

by Maurizio J Liberante