Cue the Black Swan

On 31 December 2013, only hours after the Panamanian Government gazetted a new law, shock waves went through Panama's business community. The outcry generated demands that the law be amended or repealed immediately.

The primary subject of Law No. 120 of 2013 had nothing to do with income taxes, but two articles had been inserted into it to amend the tax code. Of greatest concern was that,

"Every natural or juridical, domestic or foreign, who receives any taxable income within or outside Panamanian territory, must pay taxes."

The meaning was clear: Those who pay taxes in Panama must in the future, pay based on their worldwide income instead of just their Panamanian-sourced income.

One of those who reacted in opposition to the law was Minister for Canal Affairs and Executive Secretary of the Panama Metro, Roberto Roy. He posted on his Twitter account that the law was not carried by the Cabinet. In his view,

"Laws with this impact should be widely consulted and not addressed and approved in the non-transparent way."

This law was passed in darkness. There had been no public debate, yet it was signed into law by President Ricardo Martinelli on 30th December.

As the issue unfolded, associates in the financial industry in Panama provided me with details:

  • This was obviously done with the intent to hide it and have nobody notice until it was a fait accompli. There was no previous discussion of this anywhere. Nobody saw it coming.
  • The first reaction from the President on Twitter was to try to defend the law. At 9:48 a.m. he tweeted this: "On territoriality and taxes if we need to repeal we'll repeal or what needs to be defined will be defined, but ample debate must take place." (My translation from Spanish)
  • This was not even discussed in the National Assembly, but passed with cover of darkness, precisely to avoid any debate. And then, when he [the president] starts to feel the heat of the outrage (which he clearly underestimated, thinking that on the end of the year the public would be too busy celebrating instead of reading the Official Gazette), he talks about ample debate before any decision as to repeal or not is made.
  • He was trying to hold his position, and trying to postpone any public debate about this until first week of January. Furthermore, he talks there about "gossip and disinformation", implying that what people are commenting on social media is not the true content of the law.
  • At 13:57 the same day, Mr. Luis Cucalón, Director of Autoridad Nacional de Ingresos de Panamá (our tropical version of the "IRS"), tweeted this: "I was the one who proposed Arts. 2 and 3 of Law 120 and I made a mistake. We are not prepared for taxation of worldwide income." Then he quickly followed at 13:58 with: "I have requested Mr. President to repeal said articles, which he accepted." (My translation)
  • They grossly underestimated the outrage this would generate in the public. They first tried to dismiss this in a business-as-usual manner, but then they had to back pedal… Some people think that one of the things that made them desist from this is that some big-money big-shots made phone calls.
  • The government announced on 31 December that the law will be repealed right away on the New Year.
  • Are we back to normal and can we just dismiss this as just a bizarre episode and then things are business as usual? I wish. Unfortunately, the damage to the country's credibility is already done. I don't know how grave it will be in the long run, but after this nobody can be blamed for having second thoughts on Panama as an investment or retirement destination.

There is quite a bit more detail, but this should suffice.

So, what do we have here? A tempest in a teacup? A nasty scare that was fortunately averted? The latter is probably closer to the truth, but in addition, we have a reminder of events to come.

Government leaders seem to have a penchant for becoming so puffed up by their own power that they feel omnipotent; that when they run into difficulties, they should have the authority to simply reach in the collective pocket of the community and take whatever they need. This is not just a Panamanian condition, it is true for most all rulers, in all countries, from time immemorial.

And, certainly, the world is awash with debt, and many rulers are finding that they are running out of options by which to keep themselves and their governments afloat. We shall therefore see ever more-drastic measures being taken by the leaders of the world in future.

The episode in Panama, however, is a bellwether.

It reminds us as to the methodology that political leaders employ when they are in trouble. On 31 December 2011, US President Barrack Obama passed the National Defense Authorization Act (NDAA), giving himself sweeping powers. (Both he and Mister Martinelli used the cover of the New Year's festivities to pass legislation that would appal the voting public.)

Increasingly, we shall see governments passing legislation, issuing edicts, and taking action unannounced, as they seek to take a last squeeze of the lemon, prior to the collapse of their markets and their currencies.

To quote Thomas Jefferson,

"Those entrusted with power have, in time, and by slow operations, perverted it into tyranny."

Throughout history, it has been the nature of governments to, over time, destroy the very country that makes their dominion possible.

Today, we are at the "cliff-hanger" stage in deterioration in many of the world's governments. They are houses of cards, soon to topple. Historically, it is rarely a monumental event that topples them. Generally, it is a final straw that triggers the collapse. Moreover, it is often a "black swan" event—one that was not anticipated, or at least had not been regarded as imminent.

Panama will undoubtedly take a serious hit as a result of President Martinelli's ill- considered gaff on 31 December. But we shall see other, more major black swan events take place in the US, the EU, and other jurisdictions that are on the economic brink. Will it be the foreign creditors dumping debt back into the US market? European countries defaulting? Commodity price spikes? A bond market or stock market crash? A paper-gold crash? The announcement of a bail-in for all of the EU or the US?

The list of possible black swans is extensive. Most likely, each will occur, but we cannot be sure as to the order, nor when they will occur. However, of one thing we can be assured: We shall wake one morning to find that there has been a singular event that has set the houses of cards tumbling.

We cannot control, nor can we predict, the details of the above. What we can do, however, is accept that the houses of cards will indeed fall, and we can prepare ourselves for that eventuality.

Tags: panama, economic collapse,