The Lebowski Blog: The Real Outcome of the Quebec Election Depends on PIMCO

"Where's the f'ing money, Lebowski?"

Pacific Investment Management Company LLC. (PIMCO)  is a company you've probably never heard of, which is ironic considering that they could crash the Canadian Economy with the swoop of a pen.

Don't believe me?

Ask Greece.  And Ireland, Portugal and Spain.  And even the Quebec and Ontario governments.  This isn't conspiracy theory.  It's something that's happening all over the world. 

PIMCO is the world's largest bond investor to government, meaning that if a government is looking for a loan, you will usually end up talking to PIMCO.

In 2009, PIMCO took the unprecedented step of selling all of it's exposure to Greek, Irish, Portugese and Spanish debt.  It effectively said that it did not like the outlook in any of these countries and that it would no longer loan money to them.  Everyone followed the lead of the world's biggest bond investor. The effect has been well documented.  

Immediately business pages were quick to point out that all of these countries were going to eventually need bailouts as it was believed that investors were going to stop loaning them money.  And that's exactly what happened.

It may sound like an extra ordinary amount of power for a private company to wield...because it is.  Der Speigel says it best:

"PIMCO is by far the world's largest investor in government bonds. The company lends governments money by buying their bonds. When PIMCO stops buying a country's bonds, it's a clear sign that the country is on the verge of crisis and possibly even bankruptcy.

PIMCO controls more than $1.3 trillion (€1.05 trillion) on behalf of its customers. It is an absurd number, even in these times of superlatives, times of bailout funds and banks being supported with billions upon billions in taxpayer money. Though far from a household word, PIMCO has four times the German national budget to invest.

That's why almost all governments maintain close ties to PIMCO. They send their finance ministers, the heads of their central banks and sometimes even their national leaders to see CEO Mohamed El-Erian and convince him to buy their government bonds.

In the last few weeks of 2009, PIMCO sold all of its Greek bonds. El-Erian says the company wanted to get out before everyone else noticed that the numbers weren't adding up."

Of course, it was ridiculous.  Greece only collapsed because PIMCO pulled out, not the other way around.  And if you don't believe that, look at Spain who was on solid financial and economic footing, but collapsed anyways from being frozen out of the private bond market.  Greece is by no means an economic powerhouse...but neither was it in such dire straights as to be unworthy of loans from international investors.

Look at it in the broader context. Pulling money is not something only reserved for Greece or those other European countries.  Capitalist governments around the world are now in a major bind where they are being forced to submit to the will of PIMCO's wishes rather than the will of their angry publics.

For countries such as Germany, China, the Middle-East and Norway, this isn't a problem - they don't borrow money.  For everyone who does, it's a real problem.

The rush to austerity that so many countries have followed has been done precisely for this reason.  Many believe that Ontario has been cutting so heavily precisely with the concerns of PIMCO in mind.  It's hard to run any kind of deficit if you can't borrow money.  And almost every Canadian province and the Federal government under the CONservatives now need access to PIMCO's $1.3 Trillion.

And for those that believe this is all conspiracy theory, look no further that the head of PIMCO Canada, Ed Devlin speaking about the Quebec election:

“Marois has been pretty reasonable,” said Ed Devlin, head of Canadian portfolio management at powerful Pacific Investment Management Co. LLC (Pimco), the world’s biggest bond investor.

Early in the campaign, Mr. Devlin had sparked a minor furor in Quebec when he fired a warning shot across the province’s political bow about the danger of a resurgence of the PQ and separatist rhetoric. He published a commentary cautioning Quebec’s political leaders against “policies and rhetoric that undermine international investors’ confidence,” going so far as to suggest that a serious threat of separation could turn Quebec’s bond market into another Italy.

“I was hoping [to get the political leaders’ attention], yes,” Mr. Devlin said.

And he did. In the francophone press, the PQ publicly dismissed Mr. Devlin’s commentary as fear-mongering. But the subsequent tone of the campaign has been about as market-friendly as Mr. Devlin could have hoped.

Pimco’s Mr. Devlin acknowledged that given the tone of the PQ’s campaign, even a PQ majority government “doesn’t move the fiscal needle a lot.” However, he’s concerned that should the PQ become more aggressive on the sovereignty question – which could happen if, for instance, it wins such a slim minority that it is forced to court the more radical fringe party Quebec Solidaire to maintain power – then the stakes in the market could become significantly higher, not just for Quebec but for Canada."

Yup, you read that right.  Elect a PQ/Quebec Solidaire minority and we'll pull your loans.  It's an offer that even the Italians didn't refuse.

The Lebowski blog tracks big piles of money.  It appears regularly on the Toronto Media Co-op.