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Regular readers of the Fortnightly will know that The Solid Ground has long forecast a major debt default in Turkey. More specifically, the forecast remains that the country will impose capital controls enforcing a near total loss of US$500bn of credit assets held by the global financial system. That is a large financial hole in a still highly leveraged system. That scale of loss will surpass the scale of loss suffered by the creditors of Bear Stearns and while Lehman’s did have liabilities of US$619bn, it has paid more than US$100bn to its unsecured creditors alone since its bankruptcy.

It is the nature of EM lending that there is little in the way of liquid assets to realize; they are predominantly denominated in a currency different from the liability, and also title has to be pursued through the local legal system. Turkey will almost certainly be the largest EM default of all time, should it resort to capital controls as your analyst expects, but it could also be the largest bankruptcy of all time given the difficulty of its creditors in recovering any assets. So the events of last Friday represent only the end of the beginning for Turkey. The true nature of the scale of its default and the global impacts of that default are very much still to come.

Strong form capital controls produce a de facto debt moratorium, and very rapidly investors realize just how little their credit assets are worth. A de jure debt moratorium at the outbreak of The Great War in 1914 bankrupted almost the entire European banking system – it was saved by mass government intervention.

…click on the above link to read the rest of the article…

Five Pillars of Debt Default

July 17, 2018

Five Pillars of Debt Default

Regular readers of Gold Goats ‘n Guns know that I’ve been handicapping a major sovereign debt default to begin here in 2018 or early 2019. But, what do I mean by that?

How does a sovereign debt default come about? And who will default?

There are a staggering number of factors that feed into this thesis but, for me, to keep it simple it comes down to five important trends coming to a head at the same time.

I call them the Five Pillars.

#1 Massive Foreign Corporate Debt

After ten years of ‘experimental monetary policy’ which drove borrowing costs in U.S dollars down to record lows, foreign companies still reeling from the after-effects of the 2008 financial crisis borrowed trillions of dollars to fund the global expansion of the past few years.

That debt pays investors in US dollars.

But, foreign companies tend to book revenue in their local currency.

A falling local currency makes dollar-denominated debt more expensive to pay off.

This leads to the next Pillar…

#2 Quantitative Tightening.

QT is simply the opposite of QE, Quantitative Easing. QE expanded the stock of dollars. QT is contracting it. This is what is fueling a rising U.S. dollar. This, in turn, is making it harder for foreign companies to keep up with their bond payments.

They are forced to sell, aggressively, their local currency and buy dollars in the open market.

This is why the Turkish Lira is in serious trouble, for example.

That puts pressure on the country’s sovereign bond market. Since a falling currency lowers the real rate of return on the bond.

Falling currency, falling bonds, Turkey will put on capital controls next.

This feeds into the next Pillar…

#3 Political Unrest in Europe and Emerging Markets

…click on the above link to read the rest of the article…

Learning from America’s Forgotten Default

May 22, 2018

President Franklin D. Roosevelt signs the Gold Bill (also known as the Dollar Devaluation Bill)

Learning from America’s Forgotten Default

One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. There’s just one problem: it’s not true, and while few people remember the “gold clause cases” of the 1930s, that episode holds valuable lessons for leaders today.

LOS ANGELES – One of the most pervasive myths about the United States is that the federal government has never defaulted on its debts. Every time the debt ceiling is debated in Congress, politicians and journalists dust off a common trope: the US doesn’t stiff its creditors.

There’s just one problem: it’s not true. There was a time, decades ago, when the US behaved more like a “banana republic” than an advanced economy, restructuring debts unilaterally and retroactively. And, while few people remember this critical period in economic history, it holds valuable lessons for leaders today.

In April 1933, in an effort to help the US escape the Great Depression, President Franklin Roosevelt announced plans to take the US off the gold standard and devalue the dollar. But this would not be as easy as FDR calculated. Most debt contracts at the time included a “gold clause,” which stated that the debtor must pay in “gold coin” or “gold equivalent.” These clauses were introduced during the Civil War as a way to protect investors against a possible inflationary surge.

For FDR, however, the gold clause was an obstacle to devaluation. If the currency were devalued without addressing the contractual issue, the dollar value of debts would automatically increase to offset the weaker exchange rate, resulting in massive bankruptcies and huge increases in public debt.

To solve this problem, Congress passed a joint resolution on June 5, 1933, annulling all gold clauses in past and future contracts.

…click on the above link to read the rest of the article…

Can US Russian Sanctions Start A Financial Crisis?

May 8, 2018

Can US Russian Sanctions Start A Financial Crisis?

The US sanctions against Russia are pointless and are placing the West at risk the politicians are too stupid to even comprehend. Already, some Russian companies have asked the government for liquidity injections of up to $2 billion. Even the world’s second-largest aluminum producer Rusal has asked for help. Nevertheless, the impact of sanctions goes beyond the internal borders of Russia for they also impact the international financial markets.

For example, Rusal had previously made clear that the US sanctions are threatening their ability to even meet debt obligations. They carry $7.7 billion of debt in US dollars of which about $1 billion in debt is maturing within five years. In terms of US dollars, Rusal cannot even pay the debts because it would have to do so through US banks. That means, under the sanctions, they would have to default on their bonds. Now let’s turn to Polyus, which is Russia’s largest gold producer. Here they have also $5 billion in US debt. Those US dollar bonds maturing in 2024. doubles as sanctions become known.

The same story applies to many Russian companies for they still have to conduct business in US dollars regardless of the sanctions. For example, let’s look closer at Rusal. Here the company conducts over 60% of all its business in US dollars. The US sanctions prohibit Americans from doing business with the affected Russian companies or individuals. This is really crazy. Any Russian state-controlled bank cannot step in as an intermediate because they could then become the target of sanctions itself.

Western investors are actually the ones who will be punished by the US sanctions if the Russian companies cannot pay their debts under the law. They cannot even go to an intermediary in Europe for they too could then be targeted by the US for violating the sanctions.

…click on the above link to read the rest of the article…

Four Charts: Debt, Defaults and Bankruptcies To See Higher Gold

March 20, 2018

Four Charts: Debt, Defaults and Bankruptcies To See Higher Gold

20, March

– $8.8B Sprott Inc. sees higher gold on massive consumer debt, defaults & bankruptcies
– Rising and record U.S. debt load may cause financial stress, weaken dollar and see gold go higher
– Massive government and consumer debt eroding benefits of wage growth (see chart)

by Bloomberg

Rising U.S. interest rates, usually bad news for gold, are instead feeding signs of financial stress among debt-laden consumers and helping drive demand for the metal as a haven.

That’s the argument of Sprott Inc., a precious-metals-focused fund manager that oversees $8.8 billion in assets. The following four charts lay out the case for why gold could be poised to rise even as the Federal Reserve tightens monetary policy.

Gold futures have managed to hold on to gains this year, staying above $1,300 an ounce even as the Fed raised borrowing costs in December for a fifth time since 2015 and is expected to do so again next week.

The increases followed years of rates near zero that began in 2008. Low rates coupled with the Fed’s bond-buying spree contributed to the precious metal’s advance to a record in 2011. Higher rates typically hurt the appeal of gold because it doesn’t pay interest.

Paper Losses

The U.S. posted a $215 billion budget deficit in February, the biggest in six years, as revenue declined, Treasury Department data show. That’s boosting the government debt load, fueling forecasts for higher yields and raising the specter of paper losses for international investors who own $6.3 trillion of U.S. debt.

Slowing demand for Treasuries from overseas buyers is contributing to dollar weakness against the currency’s major peers, helping support gold prices, according to Trey Reik, a senior portfolio manager at Sprott’s U.S. unit.

Debt-Laden Shoppers

The yield on the 10-year U.S. Treasury, which has been in decline for more than three decades, has risen over 40 basis points this year as the Fed raised rates and U.S. debt ballooned to more than $20 trillion.

…click on the above link to read the rest of the article…

Oil Market Fears: War, Default And Nuclear Weapons

March 1, 2018

Oil Market Fears: War, Default And Nuclear Weapons

The U.S. is one of the few areas of the world in which there is an energy investment boom underway, a development that could smooth out the uncertainties of geopolitical events around the world. At the same time, outside of the U.S., there is a deterioration of stability in many oil-producing regions, aggravating risks for both oil companies and the oil market, according to a new report.

Financial risk firm Verisk Maplecroft explores these two trends as they play out simultaneously. The U.S. shale sector has emerged from years of low oil prices, damaged but still intact. Importantly, the shale industry “can ride out price dips and respond quickly to upticks, weakening OPEC in the process,” James Lockhart-Smith, director of financial sector risk at Verisk Maplecroft, wrote in the report. Combined with deregulation at the federal level, the oil industry is in the midst of an investment boom in the U.S.

Meanwhile, things are not so rosy elsewhere. Verisk Maplecroft surveyed a long list of countries, and produced its Government Stability Index (GSI), which uses some predictive data and analysts forecasts to take stock of geopolitical risk in various countries over the next few years.

The results are not encouraging. The number of countries expected to see a deterioration of stability “significantly outnumber those we see becoming more stable,” the firm said. The reasons are multiple, including low oil prices, but also the erosion of democratic institutions. Related: Something Unexpected Just Happened In LNG Markets

“We don’t see increasing instability necessarily ending in coups or significant political upheaval, but a less predictable above-ground-risk environment is likely to emerge,” Verisk Maplecroft’s Lockhart-Smith said. “Arbitrary decision making, possible measures to buy off key stakeholders or an inability to pass regulatory reforms will be the main risks to projects in these countries, as their governments seek to stabilise and maintain their influence.”

…click on the above link to read the rest of the article…

Turkey – Default or War?

February 26, 2018

Turkey – Default or War?

QUESTION: Mr. Armstrong, My father was ______ the banker who commissioned you to do the Turkish lira hedging project in 1983. He passed away as you know. I found this material in his files on Turkey that you apparently published back in 1985. Some articles are saying that Turkey is the epic center of debt. I do not get that sense here and I figured you were really the authority my father always quoted. Can you shed some light on this subject?

Thank you

ANSWER: Yes, I remember your father well. You have my sincere condolences. I remember that project for it was very challenging. I had to create a hedging model for the Turkish lira when nobody would make a market. That was one of my earliest synthetic creations.

The Turkish lira continues to move into hyperinflation and it has nothing to do with the fiscal policies of the government. Plain and simple – even its own people do not trust the government nor the currency. Hyperinflation takes place not because of the quantity of money, but because of the collapse in public confidence.

Turkey is BY NO MEANS the epic center of the debt crisis. That is really an absurd statement. Turkey has sold Dollar-denominated foreign debt like all other questionable emerging market countries. That is how they all have sold debt by taking the currency risk on to themselves.

I have been warning that as the US rates rise, this puts pressure on the $9 trillion of emerging market debt issued in dollars. The risk of a major debt crisis starting in Turkey is a very myopic view as we are facing a contagion of a Sovereign Debt Crisis among all emerging markets.

…click on the above link to read the rest of the article…

Cowen: Shutdown Brings “More Default Risk Than The Market Realizes”

January 22, 2018

Cowen: Shutdown Brings “More Default Risk Than The Market Realizes”

Echoing almost verbatim the bleak outlook on the US government shutdown laid out by Goldman on Friday in which the bank said the government closure could last “up to a few weeks” and become dangerous once it approaches the timing of the debt ceiling, Cowen’s senior policy analyst Jaret Seiberg writes on Monday morning that the danger of an impasse that would preclude reaching a deal to raise the debt ceiling, which the government will hit in March “is a bigger worry than a government shutdown that lasts several days or a week.”

According to Seiberg – who calls Trump an “unpredictable negotiator” over spending bill – pushing the spending bill into the debt ceiling time-line may make a package “even more politically toxic,” especially since Republicans may have more objections to raising the debt ceiling than Democrats;

On the other hand, the Cowen strategist sees little impact to financials and housing from a short government shutdown, as most housing programs will function, financial system oversight remains:

Fannie, Freddie will continue to operate; Ginnie Mae will continue to ensure principal/interest payments are made to investors; FHA can continue to approve insurance for loans, but those that require staff review might get delayed; if shutdown extends into weeks there may be problems
Fed, FDIC, OCC will continue to monitor banks; SEC will furlough employees, but key systems are governed by contracts

Finally, Pantheon’s Ian Shepherdson agrees: should the government closure extend into March, then all bets are off:

In the worst case scenario, the budget impasse could drag on, via a series of stopgap measures, until March, perilously close to the point where the debt ceiling has to raised or suspended, as was the case from November 2016 through March last year.

…click on the above link to read the rest of the article…

The Long and Winding Road to a Haircut

December 2, 2017

People queue to withdraw money from an ATM in Caracas

The Long and Winding Road to a Haircut

There are significant differences between Puerto Rico and Venezuela regarding the origins of their economic crises, their political systems, their relationship with the US and the rest of the world, and much else. Nonetheless, some notable similarities are likely to emerge as their debt sagas unfold.

CAMBRIDGE – Default is back. Sovereign finances weathered a wrenching global recession and a collapse in commodity prices surprisingly well over the past few years. But failed economic models cannot limp along forever, and the slow bleeding of the economies of Puerto Rico and Venezuela have now forced their leaders to say “no mas” to repaying creditors.

Earlier this year, Puerto Rico declared bankruptcy. At the time, the United States commonwealth had about $70 billion in debt and another $50 billion or so in pension liabilities. This made it the largest “municipal” bankruptcy filing in US history.

The debt crisis came after more than a decade of recession (Puerto Rico’s per capita GDP peaked in 2004), declining revenues, and a steady slide in its population. The demographic trends are all the more worrisome because those fleeing Puerto Rico in search of better opportunities on the US mainland are much younger than the population staying behind. And in September, at a time of deepening economic hardship, hurricane Maria dealt the island and its residents an even more devastating blow, the legacy of which will be measured in years, if not decades.

More recently, in mid-November, Venezuela defaulted on its external sovereign debt and debts owed by the state-owned oil company, PDVSA. Default on official domestic debt, either explicitly or through raging hyperinflation, had long preceded this latest manifestation of national bankruptcy.

…click on the above link to read the rest of the article…

Venezuela, PDVSA CDS Triggered: ISDA Says Credit Event Has Occured

November 16, 2017

Venezuela, PDVSA CDS Triggered: ISDA Says Credit Event Has Occured

In a long overdue, and not exactly surprising decision, moments ago the ISDA Determination Committee decided, after punting for three days in a row, that a Failure to Pay Credit Event has occured with respect to both the Bolivarian Republic of Venezuela as well as Petroleos de Venezuela, S.A.

Specifically, in today’s determination, in response to the question whether a “Failure to Pay Credit Event occurred with respect to Petroleos de Venezuela, S.A.?” ISDA said that the Determinations Committee voted 15 to 0 that a failure to pay credit event had occurred with respect to PDVSA.

ISDA said the DC also voted 15 to 0 that date of credit event was Nov. 13 and that the potential failure to pay occurred on Oct. 12. ISDA also announced that the DC agreed to reconvene Nov. 20 to continue talks regarding the CDS auction, now that the Credit Default Swaps have been triggered.

Over the past week, all three rating agencies, with Fitch Ratings most recently, declared PDVSA in default, citing the state oil company’s repeated payment delays. The oil company failed to pay yet another $80 million in interest that was due in mid-October on bonds maturing in 2027, and whose buffer period expired over the weekend. Venezuela was declared in default by S&P Global ratings for a similar issue. According to Bloomberg, Fitch said that it expects PDVSA’s creditors to recover as little as 31 percent on their investment.

The panel will now meet next week to discuss whether to hold an auction to set the rate at which the CDS will pay out. When credit swaps are triggered, buyers of the contracts have their losses covered by the counterparties that sold them the insurance-like derivatives.

…click on the above link to read the rest of the article…

Venezuela Signs $3.2 Billion Debt Restructuring Deal With Russia

November 15, 2017

Venezuela Signs $3.2 Billion Debt Restructuring Deal With Russia

As Venezuela teeters right on the brink of complete financial collapse, Bloomberg reports that Russia has agreed to restructure roughly $3.2 billion in outstanding obligations. While details of the restructuring agreement are scarce, both sides reported that the deal spreads payments out over 10 years with minimal cash service required over the next six years.

Russia signed an agreement to restructure $3.15 billion of debt owed by Venezuela, throwing a lifeline to a crisis-wracked ally that’s struggling to repay creditors.

The deal spreads the loan payments out over a decade, with “minimal” payments over the first six years, the Russian Finance Ministry said in a statement. The pact doesn’t cover obligations of state oil company Petroleos de Venezuela SA to its Russian counterpart Rosneft PJSC, however.

“The terms are flexible and very favorable for our country,” Wilmar Castro Soteldo, Venezuela’s economic vice president, told reporters in Moscow after the signing. “We will be able to return to the level of commercial relations with Russia that we had before,” he added, noting that a deal to buy Russian wheat will be signed next week.

This is the second time Russia has agreed to reschedule Venezuela’s debt payments after agreeing to an extension last year. Still, Caracas failed to make payments amid an economic crisis triggered by low prices for oil. Rosneft has also provided several billion dollars in advance payments for Venezuelan crude supplies.

The rescheduling pact is a “demonstration of the desire to maintain ties with the current Venezuelan leadership,” Viktor Kheifets, an expert in Venezuela at St. Petersburg State University, said by phone. “Russia isn’t happy with everything that the government there is doing but Venezuela is an ally where Russia has economic interests and Moscow is firmly against a forcible change of regime there.”

…click on the above link to read the rest of the article…

Venezuela Defaults On A Debt Payment – Is This The First Domino To Fall?

November 15, 2017

Venezuela Defaults On A Debt Payment – Is This The First Domino To Fall?

Did you know that Venezuela just went into default? This should be an absolutely enormous story, but the mainstream media is being very quiet about it. Wall Street and other major financial centers around the globe could potentially be facing hundreds of millions of dollars in losses, and the ripple effects could be felt for years to come. Sovereign nations are not supposed to ever default on debt payments, and so this is a very rare occurrence indeed. I have been writing about Venezuela for years, and now the crisis that has been raging in that nation threatens to escalate to an entirely new level.

Things are already so bad in Venezuela that people have been eating dogs, cats and zoo animals, but now that Venezuela has officially defaulted, there will be no more loans from the rest of the world and the desperation will grow even deeper…

Venezuela, a nation spiraling into a humanitarian crisis, has missed a debt payment. It could soon face grim consequences.

The South American country defaulted on its debt, according to a statement issued Monday night by S&P Global Ratings. The agency said the 30-day grace period had expired for a payment that was due in October.

A debt default risks setting off a dangerous series of events that could exacerbate Venezuela’s food and medical shortages.

So what might that “dangerous series of events” look like?

Well, Venezuela already has another 420 million dollars of debt payments that are overdue. Investors around the world are facing absolutely catastrophic losses, and the legal wrangling over this crisis could take many years to resolve. The following comes from Forbes…

…click on the above link to read the rest of the article…

S&P Downgrades Venezuela To “Selective Default” After Bondholder Meeting Devolves Into Total Chaos

November 14, 2017

S&P Downgrades Venezuela To “Selective Default” After Bondholder Meeting Devolves Into Total Chaos

Creditors had little expectations from today’s ad hoc meeting with “soon-to-default” Venezuela, and with good reason: not only was the meeting attended by several sanctioned Venezuelan officials, potentially jeopardizing the legal status of any bondholders who voluntarily appeared at the Caracas meeting meant to “restructure and refinance” Venezuela’s massive debt load, but it was nothing but total confusion, with neither Venezuela, nor creditors knowing what is on the agenda, why they were meeting, or what is the endgame. In sum, the meeting resulted in no firm proposals, lasted no more than 30 minutes, consisted largely of an angry rant by an alleged drug dealer who also happens to be Venezuela’s vice president, and ended as chaotically as it started.

Quoted by Reuters, one unnamed bondholder had a perfectly succinct summary of what happened today, or rather didn’t:

“There was no offer, no terms, no strategy, nothing,” the bondholder said, leaving the meeting that lasted a little over half an hour at the ‘White Palace’, departing with a colorful gift-bag containing Venezuelan chocolates and coffee.

Credit walked in as confused as they left, a little over a week after President Nicolas Maduro stunned investors with a vow to continue paying Venezuela’s crippling debt, while also seeking to restructure and refinance it; the two things are literally impossible at the same time. There is another problem: both a restructuring and a refinancing appears out of the question, due to U.S. sanctions against the crisis-stricken nation, which make discussions with the key negotiators who has been put on a sanctions black list, grounds for potential arrest. A default would compound Venezuela’s already disastrous economic crisis.

…click on the above link to read the rest of the article…

Venezuela Officially Defaults; Annual Inflation 2689 Percent: When Does the Military Take Over?

November 11, 2017

Venezuela Officially Defaults; Annual Inflation 2689 Percent: When Does the Military Take Over?

Electricidad de Caracas, a Venezuelan state-owned electric company, officially defaulted on a $650 million bond payment. The company was already a month late on its payment before the trustee, Wilmington Trust, issued a statement. Meaanwhile, Professor Steve Hanke notes annual inflation is 2689%.

CNBC reports Venezuela Utility Defaults as Judgment Day Looms for State Oil Giant.

Venezuela’s Electricidad de Caracas — a state-owned electric company — has defaulted on a $650 million bond payment, Wilmington Trust said Friday.

The default comes as the International Swaps and Derivatives Association (ISDA) prepares to decide next Monday whether state-run oil giant Petroleos de Venezuela (PDVSA) experienced a credit event earlier this month.

PDVSA missed a $1.12 billion bond payment on Nov. 2. If ISDA decides that PDVSA did experience a credit event, that could lead bondholders to declare a default, which could trigger an avalanche.

“We expect if holders do declare a default then that could be used to trigger cross default across the whole US$28bn of PDVSA bonds,” Stuart Culverhouse, chief economist at Exotix Capital, said in a note. He noted, however, that bondholders “may simply give the government more time to make the payment, as the intention seems to be there, but coordinating a large group of holders with different incentives could prove challenging.”

Food Shortages

CNN reports Venezuela’s Dreams are Dying.

President Nicolas Maduro erased any remnants of democracy in late July, stripping political opponents of power and establishing a new legislature filled with his cronies.

But Maduro’s cemented regime still faces the same problems it started years ago: An exodus of its educated class combined with mass shortages of food, medicine, money and — most importantly — time.

Shortages of basic medicine and proper medical equipment are common. More than 750 women died during or shortly after childbirth in 2016, a 66% increase from 2015, according to the Venezuelan health ministry.

…click on the above link to read the rest of the article…

Venezuela Just 24 Hours Away From Formal Declaration Of Default

November 9, 2017

Venezuela Just 24 Hours Away From Formal Declaration Of Default

Less than a week after Venezuela shocked the world by announcing it would proceed to restructure its massive external debt, even as it was within the grace period on hundreds of millions in unpaid interest expense, on Thursday the socialist nation confirmed it has never been closer to an official default after Reuters reported that Venezuela’s state oil-firm company, PDVSA, has not made a debt payments to India’s top oil producer ONGC for six months, and has previously used a Russian state-owned bank and another Indian energy company as intermediaries to make payments.

Reuters sources noted that PDVSA has made no payment since April on what was a $540 million backlog of dividends owed to ONGC for an investment the Indian firm made in a an energy project in Venezuela. Venezuela’s President Nicolas Maduro said last week that the country planned to restructure some $60 billion of bonds, much of it held by PDVSA, as the country struggles to meet debt repayments.

While ONGC Videsh – the overseas investment arm of ONGC confirmed to Reuters that PDVSA had fallen behind on the payments, but declined to give details on the delays.

Curiously, the Indian company appears not to be overly concerned about non-payment for half a year, and instead was willing to keep giving Maduro the benefit of the doubt: “They have got certain challenges at this stage,” ONGC Videsh said in an emailed response to Reuters’ questions. “They have assured that they are working on it (payment of dues). In due course it will be settled and follow up steps will be undertaken.” And just to underscore that it has no intention of pushing Venezuela into involuntary bankruptcy, ONGC added that “we have a good working relationship with PDVSA.”

…click on the above link to read the rest of the article…

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