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It shouldn’t come as a surprise that the Vice President of the World Bank Carmen Reinhardt recently warned on October 15 that a new financial disaster looms ominously over the horizon with a vast sovereign default and a corporate debt default. Just in the past 6 months of bailouts unleashed by the blowout of the system induced by the Coronavirus lockdown, Reinhardt noted that the U.S. Federal Reserve created $3.4 Trillion out of thin air while it took 40 years to create $14 Trillion. Meanwhile panicking economists are screaming in tandem that banks across Trans Atlantic must unleash ever more hyperinflationary quantitative easing which threatens to turn our money into toilet paper while at the same time acquiescing to infinite lockdowns in response to a disease which has the fatality levels of a common flu.

The fact of the oncoming collapse itself should not be a surprise- especially when one is reminded of the $1.5 quadrillion of derivatives which has taken over a world economy which generates a mere $80 trillion/year in measurable goods and trade. These nebulous bets on insurance on bets on collateralized debts known as derivatives didn’t even exist a few decades ago, and the fact is that no matter what the Federal Reserve and European Central Bank have attempted to do to stop a new rupture of this overextended casino bubble of an economy in recent months, nothing has worked. Zero to negative percent interest rates haven’t worked, opening overnight repo loans of $100 billion/night to failing banks hasn’t worked- nor has $4.5 trillion of bailout unleashed since March 2020. No matter what these financial wizards try to do, things just keep getting worse. Rather than acknowledge what is actually happening, scapegoats have been selected to shift the blame away from reality to the point that the current crisis is actually being blamed on the Coronavirus!

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The Mind Blowing Concept of “Risk-Free’ier”

March 28, 2018

The Mind Blowing Concept of “Risk-Free’ier”

The Earth is flat
Cigarettes are healthy
Leeches are the cure for everything
The universe revolves around the Earth
California is an island
Red wine is healthy, unhealthy, healthy…

Facts are essential as they offer humans a sense of stability in a chaotic world. For instance, we find comfort in the “fact” that the life-sustaining sun will continue to shine for billions of years. If there were serious doubts about this fact, our lives would be very different today.

In this article, we debunk a “fact” that serves as the foundation for the pricing of all financial assets. It was not that long ago that people who thought the earth round were labeled delirious madmen. Today, questioning the “risk-free” status of U.S. Treasury securities (UST), as we do, will lead many financial professionals to decry our prudence as foolish irrationality. That said, we would rather assess the situation objectively than get caught “swimming naked when the tide goes out”.

Mesofacts

In a must-read article entitled, My Leitner-esque Moment, Kevin Muir of The Macro Tourist blog broaches the topic of sovereign debt risk and, in what must be a moment of temporary insanity, questions the so-called “risk-free” status of UST.

Sovereign debt risk exists and said bonds default from time to time. Despite history and facts, associating the word “risk” with UST is for some reason blasphemous amongst financial professionals. The yields of UST are treated by all investors, even those nay-sayers like Muir and ourselves, to be the risk-free rate. This argument does not refer to the risk of changing yields but more importantly to that of credit risk.

All financial and investment models and theories assume that UST have no credit risk which, by definition, implies zero chance of default. What in this world has no risk? If you can name something, congratulations, we cannot.

For background, consider that sovereign debt defaults have been commonplace among big and small countries. The graph below shows the frequency by country since 1800.

Graph Courtesy Carmen Reinhart and Kenneth Rogoff

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The Curious Case of Missing Defaults

November 1, 2017

CAMBRIDGE – Booms and busts in international capital flows and commodity prices, as well as the vagaries of international interest rates, have long been associated with economic crises, especially – but not exclusively – in emerging markets. The “type” of crisis varies by time and place. Sometimes the “sudden stop” in capital inflows sparks a currency crash, sometimes a banking crisis, and quite often a sovereign default. Twin and triple crises are not uncommon.

Rising international interest rates have usually been bad news for countries where the government and/or the private sector rely on external borrowing. But for many emerging markets, external conditions began to worsen around 2012, when China’s growth slowed, commodity prices plummeted, and capital flows dried up – developments that sparked a spate of currency crashes spanning nearly every region.

In my recent work with Vincent Reinhart and Christoph Trebesch, I show that over the past two centuries, this “double bust” (in commodities and capital flows) has led to a spike in sovereign defaults, usually with a lag of 1-3 years. Yet, since the peak in commodity prices and global capital flows around 2011, the incidence of sovereign defaults worldwide has risen only modestly.

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COMPLETE The Coming European Revolution

January 12, 2016

COMPLETE The Coming European Revolution

I have warned that 2017 will be the political year from hell. What I am illustrating here is the link between a sovereign debt crisis and the Revolutionary Cycle. In 1933, Roosevelt came to power in the USA and turned the country toward socialism. That same year, 1933, brought Hitler and Mao to power. So 1934 was the revolutionary year. Such revolutions do not always bring blood in the streets. The next one is due in 2020 and we should see the system we currently live under go completely upside-down.

The revolutions of 1848 were essentially a democratic movement and an uprising against the political elite. In 1848, Karl Marx published “The Communist Manifesto” with Friedrich Engels, and was exiled to London as a result. In London, where he lived the remainder of his life, he wrote the first volume of “Das Kapital”. This undoubtedly influenced the revolutions that opened the door to communism/socialism. This also inspired the collapse of the old feudal structures and created independent national states. The revolutionary wave began in France in February 1848 when the French monarchy was overthrown. Communism actually began in France as a “commune” where people lived in one shared community with no individual property rights. It was the French who convinced Marx that communism would work better than just socialism, which he had advocated initially.

This 1848 revolution spread as a contagion, similar to what the American Revolution had done during the previous century. The contagion of 1848 spread to most of Europe and parts of Latin America. In total, it impacted over 50 countries. This was by no means a coordination or cooperation between various revolutionary trends around Europe.

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A Year of Sovereign Defaults?

January 1, 2016

A Year of Sovereign Defaults?

MIAMI – When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).

If history is a guide, such conversations may be happening a lot in 2016.

Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.

The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.

Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.

And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises.

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First Sovereign Debt Default 4th Century BC

November 1, 2015

First Sovereign Debt Default 4th Century BC

QUESTION: Mr. Armstrong; I read this time its different by Rogoff. While it is interesting about sovereign defaults, he clearly does not go back into ancient times or more than a few hundred years. If anyone would know when the first such default took place it must be you. Any idea?

ANSWER: Yes. The first such default that is definitively recorded took place at least in the 4th century B.C., when ten out of thirteen Greek municipalities in the Attic Maritime Association defaulted on loans from the Delos Temple of Apollo.

You must understand that historically, most fiscal crises were resolved through either war where the loser’s debt evaporates as Germany after WWI or the Confederate States in USA as two examples, or by currency debasement by either inflation or devaluation. This is demonstrated by numerous city debasements or reduction in weight of gold and silver coinage. One of the earliest debasements was during 404BC in Athens in the war with Sparta. The silver coinage was reduced to bronze and silver plated.

Lydia, which is where coins were invented, reduced the weight of their Stater due to war with the Persians, Cyrus the Great. This is how money supply still increased even if it was gold or silver. It never matters what is money, economic forces always conspire to create the natural course of inflation (assets rise and money declines). There is a cycle as we are going through right now of the opposite trend deflation because no single trend can be sustained without change. Hold your arm straight up above your head. Now keep it there. You will run out of energy and your arm will feel tremendously heavy causing you to put it back down. Everything works that way yet people try to deny cycles. Nothing but nothing can be sustained without change – N O T H I N G!

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Greece: It’s Time For Your Default And Debt Restructuring

June 7, 2015

Greece: It’s Time For Your Default And Debt Restructuring

For some reason, people think a sovereign default, and a subsequent debt restructuring such as Greece’s government faces, is something that is conceivable – the proverbial asteroid hitting the earth – but which has never actually happened.

Sometimes, raw data says more than words. According to a dataset from the National Bureau of Economic Research, there have been at least 153 sovereign debt restructurings since 1980.

Ideally, Greece’s government will be able to reduce the overall debt load, now around 192%, to something manageable, perhaps around 50% of GDP. This process is rife with danger, alas, and I suggest consulting with Russia (which had a default and debt restructuring in 1998-2000 that reduced the net present value of the outstanding debt by about 50%) to avoid some of the potentially bad outcomes, such as widespread asset stripping by foreign entities (which is already going on), or the loss of domestic sovereignity and the installation of some unelected EU-controlled autocrat, as arguably happened in Italy under Mario Monti. It also happened in Greece, under unelected technocrat prime minister Lucas Papademos, who was previously the governor of the Bank of Greece, and then afterwards became the Vice President of the European Central Bank. Papademos argued against a eurozone deal to write off half of Greece’s debts. He wanted a far smaller “haircut,” because a 50% writeoff would hurt banks.

Since Papademos’ stay of execution for the bankers, there have been a long series of “bailouts” by various official entities beginning May 2010, funded by directly or indirectly by taxpayers outside of Greece, notably Germany and France. None of this has helped Greece’s situation in any way. The Greek government’s debt/GDP was 130% at the end of 2010. A 50% writeoff would have reduced this to about 65%. The eurozone’s official government debt-to-GDP ratio limit is 60%.

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Germany “Not Concerned” As The Cradle Of Democracy Rocks The Autocrats And Kleptocrats | Zero Hedge

December 28, 2014

Germany “Not Concerned” As The Cradle Of Democracy Rocks The Autocrats And Kleptocrats | Zero Hedge.

With Greek CDS surging to near post-bailout highs (and short-end bond yields back above 11%), it appears the market is anxious of the endgame as tomorrow’s 3rd and final ‘snap-election’-saving vote looms. Following Samaras fearmongering yesterday, it appears Germany is starting to fear the worst (and play down its effect), as Merkel’s bloc states “the prospect of a Greek sovereign default is no longer a concern for euro member countries and financial markets,” adding “hope that Greece’s international partners would pay if the country’s policymakers refuse to carry out necessary reforms is misplaced.”However, as Bruno de Landevoisin notes, “what is at stake is none other than the prosperity of the common man pitted against the privilege of concentrated power.”

As Bloomberg reports, Germany appears to see the writing on the wall…

Hans Michelbach, a senior lawmaker from Chancellor Angela Merkel’s Christian Union bloc in parliament, says prospect of a Greek sovereign default is no longer a concern for euro member countries and financial markets because banks have got rid of their Greek bond holdings.

Any hope that Greece’s international partners would pay if the country’s policymakers refuse to carry out necessary reforms is misplaced, Michelbach says in e-mailed statement.

Greek people would be the main victims of a default

Says Greece should further privatize its public sector

* * *

But we leave it to Bruno de Landevoisin to explain the broader implications of tomorrow’s vote and the inevitable endgame…

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