Sovereign Debt Default

**Krazy P** · 11-24-2009, 06:06 PM

One of the things that happens as a consequence of an economic downturn following a financial crisis is a Sovereign debt default.

So, who do you think it will be?

I have heard Spain, Greece and even Japan mentioned.

Some of you may read Bloomberg so you know that the Fed is concerned about another bubble (a little late I would say), individual investors are moving to "bear funds" and PIMCO's boss has increased his bond holding from 45% of his portfolio to 65% of his portfolio. Now why would he do that? The upside of bonds is limited and the downside is high. The only reason he would do that is if he thought the probability of a major market correction was big. The large European Bank Societe Generale is advising its clients to seriously consider a conservative "wealth preservation" strategy - buying bonds.

Let's see ... other good news... the GDP was adjusted down by roughly 25%. The FDIC is bankrupt (in the red for $8 billion), Wells Fargo has equity of around 1.1% AFTER mark to market rules were suspended. 23% of all home owners are underwater with their mortgages and the Case Schiller folks are predicting another major leg down for RE prices. Losses at banks are at the highest level ever recorded and lending has contracted at the fastest pace ever recorded. The current economy is well past the "worst case" scenario developed to "stress test" the banks.

But wait, recovery is just around the corner!

Sorry to digress - what country is going to default?

THere is a prize for the winner who correctly predicts the next major Sovereign debt default!

**Mogura** · 11-24-2009, 06:29 PM

Econ newbie here. Please forgive the simplistic nature of my questions. But when a country experiences a sovereign debt default, who are the creditors usually? Other countries? Other countries' central banks? The population of that country?

Isn't that what happened to Argentina a few years ago? What mechanisms preciptated their sovereign debt default?

Why wouldn't the US be vulnerable to the same thing?

Thanks...

**SirJac** · 11-25-2009, 09:06 AM

From what I've heard, Ukraine defaulting is almost inevitable. In fact most the old eastern bloc states are in dire straights.

**JohnDoe** · 11-25-2009, 12:05 PM

I think there are few countries at this point whose default is not inevitable. Japan seems pretty inevitable too.

**zibber** · 11-25-2009, 12:39 PM

Let's drop all debts and act as if we aren't all bitter enemies who only care about their own fortune. I'm sure we all are, but let's play pretend.

**pip** · 11-25-2009, 12:42 PM

Come on zib....
You know full well that there's no money to be made by being 'friends'.
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**Dodeca** · 11-25-2009, 01:17 PM

Some favoured selling some of the assets the Fed has accumulated back into the markets.

It has bought $300 billion in longer-term U.S. government debt and is on its way to purchasing more than $1.4 trillion of mortgage-related securities as a way to drive down borrowing costs with overnight rates already near zero.

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The only way the Untied States will avoid default is if we tax the Fed 1.4 trillion.

**reb** · 11-25-2009, 01:23 PM

let's take all the politicians' assets, all of the assets of previous, now out of office politicians, all of the fnma/freddie/gnma staff, all of the sec employees and balance the budget! and cut congressional and white house pay to 1/10th of present levels. so much for THEIR pay packages! see if they still want to get elected (they will).

in all seriousness, prediction is very difficult. it will be some nation who everyone else says 'let's make them the goat here'. i am going to guess.....the u.s.! when this dumbass 'health' bill passes, that should be the last nail in the coffin. we're broke, that will prove we are broke beyond redemption, and also will prove our government is like a mad ex-wife with the ex-husband's credit card. dumbasses.

**Slacker** · 11-25-2009, 04:20 PM

	Originally Posted by Dodeca To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	The only way the Untied States will avoid default is if we tax the Fed 1.4 trillion.

I like a bit of financial apocalypse talk with my evening tea as much as the next guy, but the only way the US will ever default is if they run out of ink for the printing press.

**Mogura** · 11-25-2009, 05:16 PM

	Originally Posted by Slacker To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	I like a bit of financial apocalypse talk with my evening tea as much as the next guy, but the only way the US will ever default is if they run out of ink for the printing press.

The ink cartridges are made in China...
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**JohnDoe** · 11-25-2009, 08:22 PM

	Originally Posted by Slacker To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	I like a bit of financial apocalypse talk with my evening tea as much as the next guy, but the only way the US will ever default is if they run out of ink for the printing press.

Inflating the debt away is a defacto default.

**Dodeca** · 11-25-2009, 08:25 PM

	Originally Posted by Slacker To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	I like a bit of financial apocalypse talk with my evening tea as much as the next guy, but the only way the US will ever default is if they run out of ink for the printing press.

I think you forgetting that the Fed prints the money. Not the United States Government.

**lurk** · 11-25-2009, 08:41 PM

In the US, the rubber will meet the road when obvious inflation causes bond buyers to demand higher interest rates. This will push up the cost of interest on the national debt, leading to the creation of more funny money, etc., etc.

**Dodeca** · 11-25-2009, 09:20 PM

Warning: Do not watch if "you" love politically correctness.

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**Causa Mortis** · 11-26-2009, 12:25 AM

	Originally Posted by Dodeca To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	Warning: Do not watch if "you" love politically correctness. To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.

Hold assets besides dollars for your personal portfolio demand. Problem solved.

Real income is determined by real productivity. What's going on with the mediums of account and exchange matters, but not nearly as much as what's going on with real productivity.

I agree that there are a lot of nominal problems with the US economy, but I think the prognosis for the real economy is quite bright.

**thod** · 11-26-2009, 01:29 AM

The US will never default because its debt is dollar denominated. It can always find the dollars it needs by printing them. Some have said Japan will default, yet Japan's debt is mostly owned by its own citizens. As it is yen denominated, they can print more yen. The inflation created by printing may be a form of default, yet it is not a true default since everyone gets paid. The problems of sovereign default comes when a country takes debt in a currency not its own since they cannot print more currency.

Inflation is whatever they say it is and what they say it is need not reflect reality. They manipulate the numbers down. This is not only good public relations but means lower payments for index linked bonds, pensions etc.

The bond market may believe inflation is higher and request higher yields but that does not mean they will get it. The credit crunch means a shortage of money, this should mean interest rates rise to reflect that demand. Instead they cut interest rates. The central bank has an infinite supply of dollars which they will supply at that rate and private cash holders cannot demand more. Those with cash lose if they hold it and so are forced to buy assets for wealth preservation. All government debt can by financed by the printing press of the central bank and most is, they do not need savers for anything and do not care about their cries. The government gains by inflating away its debt at the expense of cash savers, it gains from the capital gains tax of those who flee to assets, thus it cannot lose. The falling dollar helps make exports cheaper providing jobs for US workers boosting the economy. Even there things are not as they seem. So long as other nations do the same the dollar need not fall relative to them. It is against asset prices that it will be seen. This is why the price of gold is at record levels.

**Krazy P** · 11-26-2009, 06:09 AM

Dubai asked for a suspension on all debt repayments - worldwide markets fell. Also, China's capital call on banks Friday afternoon is "sending ripples".

In China's case, the increase in lending by banks is what is driving their "stimulus".

It's nervous time folks.

Can I call it or what?

Wait for it... wait for it... wait for it......

**JohnDoe** · 11-26-2009, 09:12 AM

	Originally Posted by Krazy P To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	Dubai asked for a suspension on all debt repayments - worldwide markets fell. Also, China's capital call on banks Friday afternoon is "sending ripples". In China's case, the increase in lending by banks is what is driving their "stimulus". It's nervous time folks. Can I call it or what? Wait for it... wait for it... wait for it......

Flight to safety triggers dollar carry trade collapse -> welcome volatility on friday. Already Emini S&P futures are down 24.25 and euros down 0.0143 with dollar rallying 0.573 to 74.849. Quite frankly, this looks bad for the stock market, good for .. well not much :P

---------- Post added 11-26-2009 at 01:15 PM ----------

Also in greece...
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---------- Post added 11-26-2009 at 01:27 PM ----------

Watch as everyone piles also into the yen for safety (in addition to dollar)

**Mogura** · 11-26-2009, 04:14 PM

	Originally Posted by JohnDoe To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	Watch as everyone piles also into the yen for safety (in addition to dollar)

I get paid in yen. Lucky me...

**JohnDoe** · 11-26-2009, 04:52 PM

	Originally Posted by Mogura To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	I get paid in yen. Lucky me...

Until Japan defaults.

**Mogura** · 11-26-2009, 04:55 PM

	Originally Posted by JohnDoe To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	Until Japan defaults.

Hmmm... Perhaps I should purchase the currencies of resource rich countries (Aus, Can)...

**RBM** · 11-28-2009, 08:18 AM

	Originally Posted by Krazy P To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
	Dubai asked for a suspension on all debt repayments - worldwide markets fell. Also, China's capital call on banks Friday afternoon is "sending ripples". In China's case, the increase in lending by banks is what is driving their "stimulus". It's nervous time folks. Can I call it or what? Wait for it... wait for it... wait for it......

From Oil Drum editor, Gail the Actuary:


	To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts. of us have heard that Dubai World is asking for a six month delay in paying back its debt. The debt was supposedly backed by the Dubai government, so Standard & Poor's considers this a default of the Dubai government.

...
Emphasis added.
...


	It is a little early to see how the Dubai situation will play out, but it seems to me that there is a significant chance that the Dubai situation will mark the beginning of the next leg down in the downward recessionary spiral and world debt unwind. Oil prices are likely to drop, so few are likely to notice that oil ultimately plays a major role in the continuing debacle.

Emphasis added.

**wunderkind** · 11-28-2009, 12:36 PM

Where can I find trading data for credit default swaps ?

**childofprodigy** · 11-29-2009, 03:12 AM

Here's some data on countries with the highest external debt to gdp ratio in 2008

1. Luxembourg 5117.81%
2. Monaco 1843.70%
3. Ireland 1246.56%
4. Switzerland 410.25%
5. United Kingdom 404.34%
6. Netherlands 365.40%
7. Belgium 347.00%
8. Zimbabwe 294.49%
9. Denmark 288.49%
10. Austria 251.45%
11. France 231.36%
12. Hong Kong 214.74%
13. Liberia 209.01%
14. Portugal 204.26%
15. Sweden 178.88%
16. Germany 176.34%
17. Finland 175.00%
18. Norway 172.24%
19. Spain 165.26%
20. Greece 146.77%
21. Cyprus 144.38%
22. Italy 127.42%
23. Sao Tome and Principe 114.76%
24. Latvia 108.50%
25. Hungary 107.83%
26. Guinea-Bissau 105.02%
27. Australia 99.61%
28. Estonia 95.75%
29. Netherlands Antilles 95.71%
30. United States 95.22%

The US actually comes 30th place, but I'm not sure if it's something to celebrate since UAE, which already defaulted actually comes 38th place with external debt to gdp ratio of only 65.29%...Yet they defaulted nonetheless...

Japan comes 46th place with external debt to gdp ratio of 51.41%, so it's not as much of a concern as the other potential defaulters...in fact, it's in better shape than Australia which fell 27th place

**thod** · 11-29-2009, 01:17 PM

Why do people keep posting external debt numbers as if they were total debt?

If I owe you a million and you owe me a million we each have an external debt (money owed to foreigners) of a million yet out net debt is zero. Anywhere with a large financial sector will have a large external debt because it is settling international trades. The London banks owe enormous sums to foreigners who have deposited to the banks there, yet that same money is lent out to other foreigners and owed to the London banks in return. This trade dwarfs the domestic position. Since this is how banks make money, external debt is a measure of profit.

Now that you understand what external debt is, you can see why the US position is so low. Most of the the money handled by Wall St stays in the US. It only becomes external debt when it crosses borders and the US has no borders whereas Europe has many. Tiny Luxembourg (tax haven) has such a high number because all the money going through it is foreign. It has one of, it not the, highest per capita incomes in the world.

11-24-2009, 06:06 PM	#1
Krazy P Member [17%] MBTI: INTJ Join Date: Jul 2008 Posts: 703	One of the things that happens as a consequence of an economic downturn following a financial crisis is a Sovereign debt default. So, who do you think it will be? I have heard Spain, Greece and even Japan mentioned. Some of you may read Bloomberg so you know that the Fed is concerned about another bubble (a little late I would say), individual investors are moving to "bear funds" and PIMCO's boss has increased his bond holding from 45% of his portfolio to 65% of his portfolio. Now why would he do that? The upside of bonds is limited and the downside is high. The only reason he would do that is if he thought the probability of a major market correction was big. The large European Bank Societe Generale is advising its clients to seriously consider a conservative "wealth preservation" strategy - buying bonds. Let's see ... other good news... the GDP was adjusted down by roughly 25%. The FDIC is bankrupt (in the red for $8 billion), Wells Fargo has equity of around 1.1% AFTER mark to market rules were suspended. 23% of all home owners are underwater with their mortgages and the Case Schiller folks are predicting another major leg down for RE prices. Losses at banks are at the highest level ever recorded and lending has contracted at the fastest pace ever recorded. The current economy is well past the "worst case" scenario developed to "stress test" the banks. But wait, recovery is just around the corner! Sorry to digress - what country is going to default? THere is a prize for the winner who correctly predicts the next major Sovereign debt default!
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11-24-2009, 06:29 PM	#2
Mogura Core Member [175%] MBTI: INFJ Join Date: Apr 2008 Posts: 7,030	Econ newbie here. Please forgive the simplistic nature of my questions. But when a country experiences a sovereign debt default, who are the creditors usually? Other countries? Other countries' central banks? The population of that country? Isn't that what happened to Argentina a few years ago? What mechanisms preciptated their sovereign debt default? Why wouldn't the US be vulnerable to the same thing? Thanks...
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11-25-2009, 09:06 AM	#3
SirJac Member [23%] MBTI: INTJ Join Date: Oct 2007 Posts: 956	From what I've heard, Ukraine defaulting is almost inevitable. In fact most the old eastern bloc states are in dire straights.
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11-25-2009, 12:05 PM	#4
JohnDoe Core Member [130%] MBTI: INFJ Join Date: Dec 2008 Posts: 5,204	I think there are few countries at this point whose default is not inevitable. Japan seems pretty inevitable too.
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11-25-2009, 12:39 PM	#5
zibber Core Member [407%] MBTI: INTJ Join Date: Mar 2008 Posts: 16,281	Let's drop all debts and act as if we aren't all bitter enemies who only care about their own fortune. I'm sure we all are, but let's play pretend.
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11-25-2009, 12:42 PM	#6
pip Veteran Member [55%] MBTI: INTj Join Date: May 2009 Posts: 2,219	Come on zib.... You know full well that there's no money to be made by being 'friends'. To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
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11-25-2009, 01:17 PM	#7
Dodeca Member [29%] MBTI: INTP Join Date: Nov 2009 Posts: 1,176	Some favoured selling some of the assets the Fed has accumulated back into the markets. It has bought $300 billion in longer-term U.S. government debt and is on its way to purchasing more than $1.4 trillion of mortgage-related securities as a way to drive down borrowing costs with overnight rates already near zero. To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts. The only way the Untied States will avoid default is if we tax the Fed 1.4 trillion.
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11-25-2009, 01:23 PM	#8
reb Core Member [257%] MBTI: XNTJ Join Date: Aug 2008 Posts: 10,280	let's take all the politicians' assets, all of the assets of previous, now out of office politicians, all of the fnma/freddie/gnma staff, all of the sec employees and balance the budget! and cut congressional and white house pay to 1/10th of present levels. so much for THEIR pay packages! see if they still want to get elected (they will). in all seriousness, prediction is very difficult. it will be some nation who everyone else says 'let's make them the goat here'. i am going to guess.....the u.s.! when this dumbass 'health' bill passes, that should be the last nail in the coffin. we're broke, that will prove we are broke beyond redemption, and also will prove our government is like a mad ex-wife with the ex-husband's credit card. dumbasses.
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11-25-2009, 08:41 PM	#13
lurk Member [13%] MBTI: InTP Join Date: Sep 2009 Posts: 556	In the US, the rubber will meet the road when obvious inflation causes bond buyers to demand higher interest rates. This will push up the cost of interest on the national debt, leading to the creation of more funny money, etc., etc.
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11-25-2009, 09:20 PM	#14
Dodeca Member [29%] MBTI: INTP Join Date: Nov 2009 Posts: 1,176	Warning: Do not watch if "you" love politically correctness. To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.
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11-26-2009, 01:29 AM	#16
thod Core Member [162%] MBTI: INTP Join Date: Jan 2008 Posts: 6,492	The US will never default because its debt is dollar denominated. It can always find the dollars it needs by printing them. Some have said Japan will default, yet Japan's debt is mostly owned by its own citizens. As it is yen denominated, they can print more yen. The inflation created by printing may be a form of default, yet it is not a true default since everyone gets paid. The problems of sovereign default comes when a country takes debt in a currency not its own since they cannot print more currency. Inflation is whatever they say it is and what they say it is need not reflect reality. They manipulate the numbers down. This is not only good public relations but means lower payments for index linked bonds, pensions etc. The bond market may believe inflation is higher and request higher yields but that does not mean they will get it. The credit crunch means a shortage of money, this should mean interest rates rise to reflect that demand. Instead they cut interest rates. The central bank has an infinite supply of dollars which they will supply at that rate and private cash holders cannot demand more. Those with cash lose if they hold it and so are forced to buy assets for wealth preservation. All government debt can by financed by the printing press of the central bank and most is, they do not need savers for anything and do not care about their cries. The government gains by inflating away its debt at the expense of cash savers, it gains from the capital gains tax of those who flee to assets, thus it cannot lose. The falling dollar helps make exports cheaper providing jobs for US workers boosting the economy. Even there things are not as they seem. So long as other nations do the same the dollar need not fall relative to them. It is against asset prices that it will be seen. This is why the price of gold is at record levels.
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11-26-2009, 06:09 AM	#17
Krazy P Member [17%] MBTI: INTJ Join Date: Jul 2008 Posts: 703	Dubai asked for a suspension on all debt repayments - worldwide markets fell. Also, China's capital call on banks Friday afternoon is "sending ripples". In China's case, the increase in lending by banks is what is driving their "stimulus". It's nervous time folks. Can I call it or what? Wait for it... wait for it... wait for it......
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11-28-2009, 12:36 PM	#23
wunderkind New Member [01%] MBTI: INTJ Join Date: Apr 2008 Posts: 57	Where can I find trading data for credit default swaps ?
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11-29-2009, 03:12 AM	#24
childofprodigy Member [28%] MBTI: INTJ Join Date: Jan 2009 Posts: 1,132	Here's some data on countries with the highest external debt to gdp ratio in 2008 1. Luxembourg 5117.81% 2. Monaco 1843.70% 3. Ireland 1246.56% 4. Switzerland 410.25% 5. United Kingdom 404.34% 6. Netherlands 365.40% 7. Belgium 347.00% 8. Zimbabwe 294.49% 9. Denmark 288.49% 10. Austria 251.45% 11. France 231.36% 12. Hong Kong 214.74% 13. Liberia 209.01% 14. Portugal 204.26% 15. Sweden 178.88% 16. Germany 176.34% 17. Finland 175.00% 18. Norway 172.24% 19. Spain 165.26% 20. Greece 146.77% 21. Cyprus 144.38% 22. Italy 127.42% 23. Sao Tome and Principe 114.76% 24. Latvia 108.50% 25. Hungary 107.83% 26. Guinea-Bissau 105.02% 27. Australia 99.61% 28. Estonia 95.75% 29. Netherlands Antilles 95.71% 30. United States 95.22% The US actually comes 30th place, but I'm not sure if it's something to celebrate since UAE, which already defaulted actually comes 38th place with external debt to gdp ratio of only 65.29%...Yet they defaulted nonetheless... Japan comes 46th place with external debt to gdp ratio of 51.41%, so it's not as much of a concern as the other potential defaulters...in fact, it's in better shape than Australia which fell 27th place
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11-29-2009, 01:17 PM	#25
thod Core Member [162%] MBTI: INTP Join Date: Jan 2008 Posts: 6,492	Why do people keep posting external debt numbers as if they were total debt? If I owe you a million and you owe me a million we each have an external debt (money owed to foreigners) of a million yet out net debt is zero. Anywhere with a large financial sector will have a large external debt because it is settling international trades. The London banks owe enormous sums to foreigners who have deposited to the banks there, yet that same money is lent out to other foreigners and owed to the London banks in return. This trade dwarfs the domestic position. Since this is how banks make money, external debt is a measure of profit. Now that you understand what external debt is, you can see why the US position is so low. Most of the the money handled by Wall St stays in the US. It only becomes external debt when it crosses borders and the US has no borders whereas Europe has many. Tiny Luxembourg (tax haven) has such a high number because all the money going through it is foreign. It has one of, it not the, highest per capita incomes in the world.
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