Boris Johnson and the Trump White House should avoid toying with investors’ trust

Richard Harris

Published: 3:30am, 11 Sep, 2020

  • By threatening to rewrite rules, undermining their countries’ appeal to investors looking for a sure bet, the UK and US are undercutting their own credibility
  • Hong Kong, led by the unpopular Carrie Lam and mired in social crises, similarly faces a test of trust
Britain's Prime Minister Boris Johnson leaves at the end of a virtual news conference at Downing Street, London, on September 9. Johnson insisted this week that he would proceed with a bill that overrides part of Britain’s EU withdrawal agreement, despite fierce criticism from EU leaders and British lawmakers. Photo: Reuters
Britain’s Prime Minister Boris Johnson leaves at the end of a virtual news conference at Downing Street, London, on September 9. Johnson insisted this week that he would proceed with a bill that overrides part of Britain’s EU withdrawal agreement, despite fierce criticism from EU leaders and British lawmakers. Photo: Reuters

A 120-year-old Imperial Russian joke goes like this. A man shouting “Nikolai is a moron!” was immediately arrested. When up before the judge, his defence was “Nikolai was not our respected emperor, but another Nikolai!” The judge replied, “Don’t try to trick me: if you say ‘moron’, you are obviously referring to the tsar!”

The narrative is multilayered, including the capriciousness of justice, silent rebellion and the necessity for trust in the judicial system and in the leadership. It doesn’t matter how important you are – even if you’re a sovereign nation. Credibility is critical to your relationships with your counterparties – and your investors.

It is because trust is so important that it is an excellent indicator for observant investors. At one level this is obvious. Investors must trust the information they’re getting. They must trust the price movements in the stock market. That is the very reason we have a regulated investment system in major money centres.

An independently trustworthy investment system builds credibility in markets for all investors, not just a group of well-connected insiders. It may be tempting for insiders to keep it to themselves, but they actually make much more money, legitimately, in a bigger and fairer system where everybody benefits. If the rules of investment are likely to change after you’ve made the investment, then you can’t trust it.

Argentina’s President Alberto Fernandez (right), Vice-President Cristina Fernandez de Kirchner and Economy Minister Martin Guzman attend a news conference on restructuring Argentina’s sovereign debt, in Buenos Aires on August 31. Argentina last month avoided a default after reaching agreement with creditors to restructure US$65 billion in sovereign debt. Photo: Reuters
Argentina’s President Alberto Fernandez (right), Vice-President Cristina Fernandez de Kirchner and Economy Minister Martin Guzman attend a news conference on restructuring Argentina’s sovereign debt, in Buenos Aires on August 31. Argentina last month avoided a default after reaching agreement with creditors to restructure US$65 billion in sovereign debt. Photo: Reuters

About 15 years ago, the sovereign borrower Argentina began coming back to the market, seeking international investment after multiple rounds of defaulting on their international debt. My advice to an investor at the time was not to touch it with a barge pole, even though the sovereign borrower had behaved itself for several years.

True to form, Argentina again defaulted in 2014 in the wake of the global financial crisis. I was right; mere years are not enough for a habitual defaulter to regain trust; it takes decades. Trust is easy to lose and very hard to re-establish.The admission this week by Boris Johnson’s British government that it was prepared to illegally break its EU withdrawal agreement, signed only last year, was not a clever move. It is not good to renege on a deal. Johnson can hardly take the moral high ground with China if he’s happy to engage reverse gear himself.

Worse, if you show your hand as a charlatan on the last treaty, the Europeans are unlikely to trust you to keep your word next time. The financial narrative is that you earn the trust of your negotiating partners in this transaction, to build your credibility for the next transaction. It seems remarkably half-witted to show your hand ahead of new talks.

In July, the Hong Kong Public Opinion Research Institute noted that Chief Executive Carrie Lam Cheng Yuet-ngor’s net popularity fell by 7 per cent to minus 53 per cent. Even if you consider sampling errors, her position is greatly undermined by the lack of trust in her administration.

Investors have seen Hong Kong uncharacteristically wrapped by discord, riots and now the national security law. For new money to return, there will have to be more credible reasons than mere assurances of future stability from the same individuals.

US sanctions over national security law an ‘inconvenience’, says Hong Kong leader Carrie Lam

US sanctions over national security law an ‘inconvenience’, says Hong Kong leader Carrie Lam

US President Donald Trump has taken deceit and denial to an industrial scale with the most chilling assassination of trust, being a sitting president accusing the mainstream media of purveying “fake news”. If you can destroy the credibility of the independent press, you eliminate independent criticism. It is only the American constitution’s checks and balances that prevents him from silencing opponents.

In May, it was reported that some US administration officials were suggesting that the US technically default on Chinese investments in the US Treasury bond market, which is by far the single most important in the financial system. It has grown so big because it has operated with largely the same rules for over a century.

To arbitrarily tell a particular counterparty that you are not going to pay back their money invested in the deepest and most liquid investment pool in the world would destroy trust not only in Treasuries, but also the world financial order.

The lack of interference over the best part of a century is also why the US dollar remains the world’s reserve currency. On the US dollar it is written, “In God we trust”. The global financial system invests in trust. Trust in the dollar has been won because everybody knows the long-standing rule that the invisible hand of the market determines its value.

Even sovereign nations need to maintain credibility to preserve the flexibility of their future actions. If Johnson breaks a treaty, he would undermine trust in investing in Britain, and if the Americans were to tinker with the bond market, they would destroy trust in the global financial system.

Investors can take advantage of trust as a major financial indicator. Money goes where investors think it can make a return; and the more uncertain and untrustworthy that return, the less likely it is to attract badly needed finance.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster, and financial expert witness