Category: Economics, Finance, and Political Economy

Dec 19, 2019, 12:09 PM by Michael Churchill Global capital hates defaults because they puncture the whole perma-debt system that keeps overall interest rates lower than they would be otherwise. It’s socialization of risk taken to the meta-level. The most obvious example at present is Argentina, whose debt profile is ludicrously unsustainable. They are a ward of the IMF. Without foreign help Argentine dollar bonds would collapse to zero overnight. But you know with smoke and mirrors you can sort of keep them trading — sometimes at 40 cents on the dollar, sometimes at 75. But either way nothing collapses. To give an idea of scale, Argentina’s foreign-owned dollar bonds are about $150 billion face value. So it’s a lot … enough to create a mini tidal wave if they went to zero … but not the end of the world. The knock on effect would be the removal of the safety net. So everybody else’s yields on dollar bonds would go from 3% to 4.5% right quick. Other countries in shaky terrain are Sri Lanka, Pakistan, Egypt and Lebanon. That said, MOST emerging markets are quite solvent. Basically 97% of the other EMs not mentioned above are fine. Much better than 20 years ago.

CD: I want to point out that it’s in the US’s strategic interest now to NOT generate global stability. And in particular, causing a collapse in Pakistan would be extremely useful for much of the world.

Dec 19, 2019, 12:09 PM by Michael Churchill Global capital hates defaults because they puncture the whole perma-debt system that keeps overall interest rates lower than they would be otherwise. It’s socialization of risk taken to the meta-level. The most obvious example at present is Argentina, whose debt profile is ludicrously unsustainable. They are a ward of the IMF. Without foreign help Argentine dollar bonds would collapse to zero overnight. But you know with smoke and mirrors you can sort of keep them trading — sometimes at 40 cents on the dollar, sometimes at 75. But either way nothing collapses. To give an idea of scale, Argentina’s foreign-owned dollar bonds are about $150 billion face value. So it’s a lot … enough to create a mini tidal wave if they went to zero … but not the end of the world. The knock on effect would be the removal of the safety net. So everybody else’s yields on dollar bonds would go from 3% to 4.5% right quick. Other countries in shaky terrain are Sri Lanka, Pakistan, Egypt and Lebanon. That said, MOST emerging markets are quite solvent. Basically 97% of the other EMs not mentioned above are fine. Much better than 20 years ago.

CD: I want to point out that it’s in the US’s strategic interest now to NOT generate global stability. And in particular, causing a collapse in Pakistan would be extremely useful for much of the world.