FinancialGuy Writes!

Big Trouble In Little Malta

The car bomb murder of Daphne Caruana Galizia in Malta is likely to set off a powerful chain of destructive events over the coming few years.

In case you have not seen the news (explained well here), it is difficult to underestimate the impact that she had. Personally, I admired her greatly. She had the kind of balls to take on all comers that I wish I had myself. Through the Panama Papers scandal she admitted that her blog was receiving more than 550,000 visitors most days. To put that in perspective, Malta’s population is around 430,000. Could you imagine a one person blog in Germany, France or the UK receiving more visitors each day than the population of the country? That is an influential woman. Though few would like to admit this, she was easily Malta’s most influential female and had been for years.

All sides of the Maltese political debate were in her crosshairs, if the standards or behaviour of the people involved was lower than she believed it should have been. (Hint: standards of behaviour of public officers is often below every acceptable norm here in Malta). This will make it difficult to track down the culprits behind her murder – there are many, many people with a motive.

Let’s be clear here. Her murder is not the start of something. Malta’s current problems are very deep rooted. I just believe that her murder is likely to be the catalyst for much worse to come.

It seems to me that there are four important overriding situations that will be caused by her murder.

1. Political fallout
There have already been some small scale demonstrations and more will follow. These will not be enough to force any real political change but they will make life uncomfortable for the ruling Labour Party.

Having won a massive majority a few months ago, the ruling Labour Party must feel quite secure for now. On top of that, the recent appointment of a businessman (with allegations of corruption circling around him) as Leader of the Opposition, will have repulsed many of the Nationalist’s voter base. In a general election tomorrow, I would guess that the Prime Minister would attract an even larger majority, simply because many Nationalist voters would stay at home.

In other words, if people want actual change, they will somehow need to take power for themselves and create the changes they want. I don’t see that happening any time soon.

However, it is almost impossible to imagine that someone as vulnerable as Daphne did not keep a box (or several) of papers in a law office strong room somewhere for safekeeping. She was sued for libel so frequently that she must have kept very orderly records to keep herself within the law. If those documents are released then all hell will break loose here.

As a side note, it is worth pointing out that one of her three sons worked with the ICIJ on the Panama Papers release, part of the Pulitzer Prize winning team, so some of the skills to release her trove of documents is literally “in-house”.

2. Social fallout
I’m not sure that most Maltese are self-aware enough to do this, but if and when those documents are published, there will need to be some real introspection. Many people in Malta hated DCG for the “lies” she published about their favourite politician(s). I have heard friends – people whose opinion I trusted – describe her as a bitch or a witch to me. (A friend of mine was aghast to see people out in the streets celebrating the news of her murder. Who celebrates murder…???)

My own personal guess is that she had documentary evidence for virtually everything that she published. Will Malta then be able to look itself in the mirror and admit that she was right, the politicians/judges/business owners/police etc were up to no good and that individual opinions about her were wrong? I’m unconvinced that they will, but there might be some uncomfortable moments for every Maltese.

They might have hated her, but in time, she may well come to be remembered as Malta’s patriot number one.

3. International fallout
Most countries like to view their problems as their own and would rather deal with them away from the eyes of the world. This murder has, sadly, put Malta on the map for every police force, international organisation and news outlet.

The words used in reports – both locally and internationally – have described the lack of independence in the judiciary and police, weak civil institutions and more. Rightly so. DCG wrote about them frequently and was disliked for it by many. By asking for help from both the Netherlands and the FBI to investigate, the Prime Minister has essentially declared to the world that he does not trust the local police to do a good job either.

Let’s just pause on that thought for a moment. The Prime Minister appoints Malta’s top police officers and even he lacks confidence in their abilities to investigate this crime.

In his defence, DCG was an exceptionally harsh critic of his. If Prime Minister Muscat wants justice to be seen to be done, then he has little real choice but to ask for outside assistance.

As a rule, the Maltese are not very open to criticism. If a foreigner complains, it is quite a common occurrence to be told, “You should go back to your own country then”. While I disagree with the sentiments, I understand where they are coming from. However, I have had the chance to see first hand Maltese friends complain and be told, “You don’t have to stay. If you don’t like it, leave.”

From here on, there is going to be a lot of international criticism of Malta. Heck, by calling in the FBI, the Prime Minister has requested it! This will be very painful for a lot of Maltese to hear. I fear that it won’t be a friendly place to live for much longer.

4. Economic fallout
The Maltese economy is driven by a few key sectors: tourism, igaming, financial services, real estate and now also the passport business.

It may not be too obvious to most of the local population, but each of those sectors is driven by one thing: foreign money.

Tourists are people that visit for a few days or weeks and leave some of their money behind as they do.

The igaming sector is built around Malta offering lower taxes and costs to operate from than in other larger countries, meaning that there are very few (any?) gaming firms that focus on the Maltese market, everyone is targeting the UK, Scandinavia, Germany, etc. That requires lots of foreign staff, paying their taxes and renting properties locally.

The financial services sector is driven by legislation that makes Malta an attractive place to register a ship/aircraft/trust etc – if you are not a local – though it is local law firms and consultancies that do the work and invoice.

Malta’s real estate sector is now driven by the foreign population in a few key geographic areas. It is suprisingly difficult for a non-Maltese to be granted a mortgage in Malta, so the locals are landlords renting out to the rest of us. In the last five years rents have rocketed upwards – by much more than 100%. That cash ends up in the hands of the local rentier population, who, it must be added, barely pay any tax on it. Tax avoidance in general is rampant, but on rental properties it is almost universal.

When it comes to building new properties – Malta is a literal building site at the moment – almost every project or development is “luxury”. Who they think is going to buy all these high-end apartments is unclear. Maltese investors may buy them to rent out, but then they will need foreign tennants.

The passport sector is quite underground. Few people really understand it well. Daphne reported on it regularly. What is clear is that there is an enormous amount of money involved. Each applicant needs to rent or buy a property above minimum values, which has helped to drive the real estate sector even further upwards.

All of this is great – Malta is good at attracting inward investment. Good for Malta!

The problem is that much of this money is built on safety and trust. A financial truism is that, “The return of your money is more important than the return on your money”.

In the current climate where the Prime Minister, his wife, (former) Energy Minister, Chief of Staff, their accountant and the leader of the opposition are all somehow alleged (all uncovered and reported on by DCG) to be involved in money laundering, it is not easy to imagine the international financial services sector seeing Malta as a good place to do business. Risk committees in London, Frankfurt, Berlin and Paris must all be looking on in amazement and asking their contingency planning experts how they can pull out of the country. NOW!

There have already been hints and rumours that Malta has lost some of it’s key US dollar market access. If more follows, it will be a heavy blow.

The question is, if the financial service sector leaves, can igaming really justify staying? These are all very international businesses and relocation is very possible. If those two things happen, the real estate sector will be turned upside down. These would cause an economic depression. Considering that the Maltese business model is primarily undercutting the costs of other EU nations, it is not easy to imagine the EU coming to Malta’s rescue. Changes will be demanded and Malta’s economic model could end.

Some time ago, a friend alerted me to a comment underneath an article on the Times of Malta, by a Maltese reader. I’m sad to say that I can’t locate it now. It said, “The best thing about Malta is the sun and luckily for us it is so big, so hot and so far away that even the Maltese can’t screw it up”.

Perhaps not. But it feels as though almost everything else is screwed up right now.

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