The Cayman Islands, debt and capital flight
Posted in Uncategorized on September 29th, 2009 by Abhi – Be the first to commentI found some interesting
articles a few days ago about the current situation in the Cayman
Islands.
http://www.guardian.co.uk/world/2009/sep/25/cayman-debt-crisis-budget-postponed
The area is a British overseas territory located in the Caribbean, considered a “Mecca” for many of the most “notorious” financial institutions, like hedge funds, banks and other financial services firms.
Recently, the government of the area has been facing a large debt crisis partly brought about following expenditure on a large infrastructure program. It is now facing difficulties to continue financing its activities as the UK foreign office is currently not signing or permitting to grant its budget proposals involving large loans from banks.
Instead this territory is now being muscled to introduce direct taxation in the form of a payroll tax. In the guardian article, it has been mentioned how many of these firms have strongly indicated how these may have dramatic consequences, strongly hinting at reallocation. Understandably, the Cayman Islands government have been strongly resisting the pressure and protesting the current actions of the Foreign Office.
Indeed, this does provide a good microcosm I feel of the problem generally faced by small states, that also helps explain why many of them tend to be far more economically liberal. As noted by Hans Hermann Hoppe, states always
face the threat of exit, especially by often their most productive citizens. This threat is particularly fatal to states like the Cayman Islands, that will no doubt be hit hard should much of the financial services sector decide to relocate.
The broader picture also reveals the threat from larger territories and cartels, in this case the UK and the EU. Many commentators and politicians have naively regarded the existence of complicated financial instruments, and even
speculators who profit from judging the tendency of the market, and actually help enable its equilibration; as the chief culprits of the recession. A more careful reflection on what may be motivating these individuals reveals a far more sobering conclusion. Larger states have long been hateful of these “tax havens.” Indeed, the Cayman islands may well be high on the target list given it’s place on the OECD’s “black list”, and given the recent pledge by our wise overlords at the G20 conference to impose sanctions on these irksome holdouts of a long passed liberal age.