Sunday, August 1, 2010

Sovereign debt defaults

GMO has a wonderfully written piece on sovereign debt, an issue I touched upon here. Both I and other bloggers say his paper is a must read.

For those who don't have time to find it ont he net, here are the points that caught my eye. Many people point to debt to GNP ratio in their concerns

  1. Russia defaulted in 1998 when goernment debt was 12.5 percent of GDP.
  2. Japan has a debt of twice its GDP and its government bonds yield from 0.13 percent to 1.81 percent depending whether one looks at three months or three decades.
  3. Adam Smith and David Hume were very concerned about the real growth of English debt after the Napoleanic wars. Here debt was 250 percent of GNP and the percentage was similar in the interwar years and after woerld war II. During the first run up, the electorate, which was a small percentage of the demos, voted for deflation so their government debt holdings increased in value. And the debt went down from Napoleonic levels.
  4. In the depression, there were major defaults; 90% of foreign bonds sold in 1929 subsequently defaulted.
  5. There have been cycles of international ledning and default goign back to the 1820's. Often a bank panic in London or New York precipitates the wave of defaults.
  6. In 1820's, Greogor MacGregor posed as the rule of a fictitious Latin American country and got a loan from a London bank.
  7. Latin American countries defaulted several times. This started in 1820--shortly after their independence.j
  8. In 1557, Emperor Philip II of Spain defaulted--and they still had their colonies producing gold. The "first international credit crisis" Short-dated debt was 3.5 times revenues. Just before this default, he was paying fifty percent annual interest.
  9. Dudley Baxter in the 1800's said that governments in sourthern Europe were spendthrift. Spain defaulted thirteen times since 1800. Portugal defaulted five times.
  10. When countries were able to reduce their debt to GDP ratio, they did it by strong real growth as England did with the industrial revolution and its empire and the Scandinavians did.
  11. Public finance is a Ponzi scheme--people keep buying the debt of these countries, which money is used to roll over (i. e. payoff) earlier purchases of debt.
Henry T. C. Hu talked about GMO in his article in Business Lawyer. Richard Cheney, Senator John Kerrey and Harvard University use Gratham, Mayo, Van Otterloo and Company for asset allocaton and it regularly posts history and predictions thereto.

I will talk about this article later on portfolio asset class returns, "The New Portfolio Society, SEC Mutual Fund Disclosure, and the Public Corporation Model, August 2005, 60(4), page 1303.

For Future Thoughtful Thursdays

  1. Walter Bagetot The Danger of Lending to Semi-civilized Countries 1867
  2. Max Winkler foreign bonds: An Autopsy 1933
  3. Ilse Mintz, Deterioration in the Quality of Foreign Bonds Issued in the United States 1820 to 1830, 1951.
  4. Carmen Reinhart and Ken Rogoff, This Time is Different 2009.

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