How Risky Is Uncle Sam?
The first time I heard the phrase “country risk” associated with the United States of America I was at an international private equity conference in the fall of 2009. I was shocked that European investors were applying analytical techniques to the U.S. that were more appropriate for unstable developing countries.
I had been a full-time practitioner of country risk analysis in West Africa some years ago. The work required some understanding of economics, but it was mostly about the government and politics. The key questions always revolved around the predictability of future government actions and the stability of the institutional power structures.
The old-timers would say that it is easier to deal with a stable military dictatorship than some emerging chaotic democracy. In Mauritania, for example, a coup d’état was nothing more than the group of colonels that ran the place replacing the current President with another of their own. No muss, no fuss. Of course, the colonels generally have a predilection for central planning, which meant the economy was doomed long-term, and there was always a reasonable probability that the place would turn into an Egypt or a Syria.
So what was the trigger that led those Europeans to begin to size up the U.S. as if it was some banana republic?
The driver was the high profile reordering of unsecured claims in the General Motors bankruptcy. You may recall, in that case, unsecured bondholders received about ten cents on the dollar while unsecured union claims garnered about 93 cents. The Europeans saw this as “capricious” and outside the bounds of the normal institutional process. It was obvious to them that, as the key beneficiaries of the lopsided split were a core constituency of the President, the decision process was entirely political. With not a small dose of hyperbole they told me, “This is what they do in Venezuela and Zimbabwe.”
According to Euromoney, the U.S. has slipped to a Tier 2 risk profile, one notch below countries like Canada, Germany and Switzerland. For calibration purposes, note that Greece is Tier 5 (the lowest) so we still have our head above water.
Despite maintaining that comfortable ranking with Euromoney, today those same investors would find numerous instances of capricious political decision-making that has a direct impact on businesses and investors.
Here are some examples:
- In 2009, the Senate controlled by the President’s own party refused to pass cap and trade for “climate control.” In response to the failure of their legislative agenda, the EPA declared a commonly occurring atmospheric compound to be a pollutant, giving them vast new regulatory powers. More recently, the Administration decides to stop “waiting for Congress” and take action on climate control using administrative powers.
- In July, the Obama Administration delayed implementation of the corporate mandate in the Affordable Care Act (ACA) while leaving other parts of the law intact. It is possible that this action was to slow the restructuring underway in the corporate sector whereby over 75 percent of the new jobs created this year are part-time positions. This odd drive toward a French-style workweek will allow them to avoid the $3,000 per job Obamacare penalty.
- In June, U.S. District Judge Lucy Koh in San Jose, California, issued a preliminary injunction barring a certain Samsung product pursuant to a case brought by Apple. In August, when Samsung won a similar injunction barring some Apple products via the U.S. International Trade Commission, the Administration vetoed the decision. This is the first time a President has overturned a decision by the ITC in 26 years. Foreign observers noted the lopsided nature of the two decisions, overlooking the nuance that one action was legal and the other regulatory. The injunction cost Samsung shareholders a cool $1 billion overnight.
- The alleged harassment of political opponents through the apparent politicization of federal agencies like the IRS is another classic case of institutional weakness. Remember that President Nixon attempted to use the IRS to harass political opponents as well. When IRS Commissioner, Johnnie Mac Walters, received the enemies-list from White House counsel, John Dean, he went immediately to his boss, Secretary of the Treasury, George Shultz, who advised him to lock up the list and take no action. Today, with a top IRS official “taking the Fifth Amendment like a mafia Don,” one contact scolded me, “It seems the ethical foundation of federal agencies is slipping.”
Unfortunately, the President’s own statements just add to the worries of risk analysts. Discounting the uproar around the selective delays of the Affordable Care Act, he said, “This is the kind of routine modifications or tweaks to a large program that’s starting off that in normal times in a normal political atmosphere would draw a yawn from everybody.”
Then in a NY Times interview, July 24, 2013, Obama pointed out that “where Congress is unwilling to act, I will take whatever administrative steps that I can in order to do right by the American people.”
Obama also said, “Whenever Congress refuses to act, Joe and I we’re going to act.”
Since political times are “not normal” and Congress won’t follow the President’s agenda, we are instructed that institutional processes with a very long history can be set aside. This is presidential language that risk analysts understand. They just wouldn’t normally associate it with the world’s leading democracy.