29/6/19: Why Moody’s is wrong to keep Cyprus on junk status

Euromoney on Cypriot economy: "Why Moody’s is wrong to keep Cyprus on junk status" https://www.euromoney.com/article/b1g125jl1wvf0v/why-moodys-is-wrong-to-keep-cyprus-on-junk-status with a comment from myself.

13/6/19: Russian International Reserves and Government Debt

Earlier today, an esteemed colleague of mine tweeted out the following concerning Russian foreign reserves:

Which is hardly surprising, as Russia has been beefing up its reserves for some time now, following the crisis of 2014-2016 and in response to the continued pressures of Western sanctions. I wrote about this before here: https://trueeconomics.blogspot.com/2019/04/10419-russian-foreign-exchange-reserves.html.

It is interesting in the light of the above news to look at Russian Government 'net worth' or 'net debt' (note: this is not the total external debt of Russia, nor Government external debt, but the total Russian Government debt comparative). Here is the chart based on the OECD data, with added estimate for Russia for 1Q 2019 based on IMF data and the latest data from CBR:

Based on my estimates and on OECD data itself, Russian Government has the largest positive net worth (lowest net debt) of any country in top 10 countries in the world (measured using nominal GDP adjusted for Purchasing Power Parity), and it is in this position by a wide margin.

The caveat is that India, China and Indonesia are not reported in the OECD data. China's Government net worth is virtually impossible to assess, because the country debt statistics are incomplete and measuring the gross wealth of the Chinese Government is also impossible. India and Indonesia are easier to gauge - both have positive net debt (negative net worth). IMF WEO database shows estimated General Government Net Debt for Indonesia at 25.5 percent of GDP in 2018. India has substantial gross Government debt of ca 70% of GDP (2018 figures), and the Government holds minor level resources, with country's sovereign wealth fund totalling at around 5 billion USD.

Another caveat is where the debt is held (Central Banks holdings of debt are arguably low risk) and whether or not assets held by the Governments are liquid enough to matter in these calculations (for example, Russian gold reserves are liquid, while some of the Russian funds investments in local enterprises are not). These caveats apply to all of the above economies.

On the net, this means that Russian Government is financially in a strongest leveraging position of all major economies in the world.

22/4/19: At the end of QE line... there is nothing but QE left...

Monetary policy 'normalization' is over, folks. The idea that the Central Banks can end - cautiously or not - the spread of negative or ultra-low (near-zero) interest rates is about as balmy as the idea that the said negative or near-zero rates do anything materially distinct from simply inflating the assets bubbles.

Behold the numbers: the stock of negative yielding Government bonds traded in the markets is now in excess of USD10 trillion, once again, for the first time since September 2017

Over the last three months, the number of European economies with negative Government yields out to 2 years maturity has ranged between 15 and 16:

More than 20 percent of total outstanding Sovereign debt traded on the global Government bond markets is now yielding less than zero.

I have covered the signals that are being sent to us by the bond markets in my most recent column at the Cayman Financial Review (https://www.caymanfinancialreview.com/2019/02/04/leveraging-up-the-global-economy/).

22/12/18: Chile on course for a higher credit rating

My recent comment on improving credit conditions in the case of Chile via Euromoney: https://www.euromoney.com/article/b1by3mb0pskp43/chile-on-course-for-a-higher-credit-rating.

17/10/17: Welcome to the Keynesian Monetarist Paradise

Via IMF, a chart plotting changes in sovereign debt holdings across Government, International & Central Bank agencies (so-called G-4 Official) and private debt holders:

Note:

1. These are changes in the stock of debt, not the actual stock of debt;
2. These are changes in the stock of debt of only four largest advanced economies;
3. These are changes in the stock of only sovereign debt, excluding quasi-sovereign, private and household debts; and
4. The years of forward forecast are, allegedly, the years of QE unwinding.

This debt bubble is a money-printing bubble which is a Keynesian Government 'stimulus' bubble. Look at the above. QED.

And, if you have not reaped its upside, you will pay its downside. Now, check your pockets.

10/2/17: Sovereign Debt Bubble: Methane Emissions from the Debt Dump

Because global pile of debt growth has been outpacing global economic growth for quite some time now, the sovereign debt bubble is getting wobblier by the day.

As Fitch Ratings noted yesterday: "The number of Fitch-rated sovereigns with 'AAA' ratings is at its lowest level since 2003 and is expected to remain unchanged over the next two years". In other words, non-junk is getting smaller and smaller, even as Central Banks continue to hold more of the prime stuff.

Currently, only eleven countries have 'AAA' status with Fitch, compared with an all-time high of 16 during 2004 to 2009, "reflecting the longer term impact of the global financial crisis." Personally, I don't think this reflects the impact of the GFC alone. Instead, it reflects the fact that majority of Governments around the world have gone on a debt-piling binge post-GFC in the absence of real productivity and economic growth.

All in, less than 10 percent of the global sovereign debt issuers are now rated AAA. And only 40 percent of global sovereign debt volumes fall under AAA rating (much of this sitting in the Central Banks' vaults), "down from 48% a decade ago".

Source: Fitch Ratings

27/1/17: Sovereign Debt Junkies Can't Get Negative Enough in 4Q 16

There’s less euphoria in sovereign borrowers camps of recent, but plenty of happiness still.

Per latest data from FitchRatings, “global negative-yielding sovereign debt declined slightly to $9.1 trillion outstanding as of Dec. 29, 2016, from $9.3 trillion as of Nov. 28, 2016… The decline came from the strengthening of the US dollar and little net change in European and Japanese sovereign long-term bond yields.” In other words, currency movements are pinching valuations.

Notably, “there was $5.5 trillion in Japanese government bonds yielding less than 0%, down about $2.4 trillion since the end of June 2016. Slight increases in Japanese yields and a weaker yen contributed to the ongoing decline in the amount of negative-yielding debt outstanding in Japan.” Never mind: world’s third largest economy accounts for 60.5 percent of all negative yielding sovereign debt. That’s just to tell you how swimmingly everything is going in Japan.

11/1/16: Dealing with Systemic Sovereign Debt Crises: IMF's Animal Farm Model

IMF brainiacs have been struggling over time to develop some sort of a coherent framework for managing the fallouts from systemic sovereign debt crises. So far, the golden rule has ben elusive for them. However, following the Cypriot and Greek experiences with private sector bail-ins and realising the direct connection between these experiences and the cases of other peripheral Euro area states, most notably Ireland and Portugal, the IMF have been coming around to the idea that while all countries are ‘equal’, some are ‘more equal’ than others. In other words, that in the world where might is right, there are two tiers of countries: those that get whacked and those that get properly rescued.

Behold the IMF’s latest thinking on the subject. Sandri, Damiano of IMF’s research department authored a new working paper, titled “Dealing with Systemic Sovereign Debt Crises: Fiscal Consolidation, Bail-Ins or Official Transfers?” (October 2015, IMF Working Paper No. 15/223: http://ssrn.com/abstract=2711133).

It says what it does: “The paper presents a …model to understand how international financial institutions (IFIs) [read IMF and European ESM/EFSM/EFSF and so on] should deal with the sovereign debt crisis of a systemic country, in which case private creditors' bail-ins entail international spillovers.” Notice the emphasis on ‘systemic’ country. In other words, ‘not the ordinary fry’ like smaller ‘peripherals’.

“Besides lending to the country up to its borrowing capacity, IFIs face the difficult issue of how to address the remaining financing needs with a combination of fiscal consolidation, bail-ins and possibly official transfers. To maximize social welfare, IFIs should differentiate the policy mix depending on the strength of spillovers. In particular, stronger spillovers call for smaller bail-ins and greater fiscal consolidation.” Which simply says: more systemic is a country, less risk of bail-ins, so if you are a French or a German depositor or lender, you are lucky. If you are a Belgian or Irish depositor or lender, tough sh*t, mate.

“Furthermore, to avoid requiring excessive fiscal consolidation, IFIs should provide highly systemic countries with official transfers. To limit the moral hazard consequences of transfers, it is important that IFIs operate under a predetermined crisis resolution framework that ensures commitment.” Oh, what this means is that systemic countries get bailed out via official sector (IMF et al) burden sharing. Small countries - get screwed by not having access to such largess.

Here’s more beef from the paper:

“…consider the optimal policy mix to address the financing needs of a non-systemic country, for which bail-ins do not entail international spillovers. In this case, besides lending to the country up to its borrowing capacity, IFIs should use only fiscal consolidation and bail-ins.” In other words: small country gets only funds sufficient to cover its standing allowance under the normal rules and not a penny more. Rest of ‘rescue’ funds should be squeezed out of the country economy. “Official transfers should …be avoided because they do generate severe moral hazard since they are not priced into countries’ ex-ante borrowing rates.” Which simply says: look, bailing out through official burden sharing will not increase fiscal pain for smaller countries as yields on government debt are not going to rise high enough.

So, please, whack these small countries harder, to teach them a lesson and who cares about their economies and people. Lessons matter, you peasants.

Now onto systemic countries case: “Dealing with the sovereign debt crisis of a systemic country, …a first implication is that bail-ins should be used to a lesser extent since they are more socially harmful due to the associated spillovers. If IFIs are prevented from providing transfers, any reduction in bail-ins would need to be offset entirely through an increase in fiscal consolidation. In this case, systemic countries might be required to endure an excessive amount of consolidation to spare the international community from the systemic consequences of bail-ins. When dealing with systemic countries, it may thus become efficient to compensate the reduction in bail-ins not only through greater fiscal consolidation, but also with official transfers.” So in simple terms: if you are a big country, you will be treated entirely differently from a small country. Never mind that moral hazard thingy - systemic countries get official sector burden sharing, lending over allowed capacity and less bail-ins pressure.

Of course, the IMF Working Paper is not reflective of the Fund official position, as disclaimers go. So this paper is nothing more than a ‘discussion’ of what should take place, rather than what will take place. But, of course, we all know one simple fact: in the world of IMF, some countries are ‘more equal’ than others.

10/12/15: Europe's Negative Yields Ship of Fools

Those of you who follow my work would know that I hold little compassion for the 'investors' who are willing to give money away to the governments whilst whingeing about high rates of taxation they endure on their incomes. Well, Europe is full of this sort of investors:

And it is getting more full by the minute at EUR2.7 trillion and counting. So, happy waisting your money...

30/5/15: Private Sector Counter-Proposal for Ukrainian Debt Restructuring

An interesting and far-reaching article on Ukraine's attempts to restructure some of its debts via Bloomberg: http://www.bloomberg.com/news/articles/2015-05-29/ukraine-creditors-said-to-offer-coupon-cuts-10-year-extension-ia9ao4ey

In the nutshell, Ukraine needs to restructure its debt per IMF three targets for debt 'sustainability':

• generate $15 billion in public-sector financing during the program period; 
• bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and 
• keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025

Note, these are different than what Bloomberg reports.

Key difference, however, is the matter of Russian debt. S&P note from February 2015 addressed this in detail: see more here: http://trueeconomics.blogspot.ie/2015/04/15415-s-ukraine-ratings-and-reality.html. In simple terms, Ukraine's debt to Russia is not, repeat: not, a private debt. Instead it is official bilateral debt. As such it is not covered by the IMF programme condition for restructuring privately held debt regardless of whatever Ukrainian Rada or Government think. Full details of the IMF programme are linked here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-ninth-time-is-gonna-be-lucky.html

As I noted in March note, "IMF has already pre-committed Ukraine to cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme" (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) Once again, Bloomberg 'conveniently' ignores this pesky fact about only private debt being covered.

Now, it appears we have the first private sector offer for restructuring. It is pretty dramatic, as Bloomberg note linked above outlines. But it is clearly not enough, as it involves no cuts to the principal. This is the sticking point because the proposal front-loads notional savings to the amount of USD15.8 billion, but it subsequently requires Ukraine to repay full principal - a point that is not exactly in contradiction to the IMF plan in letter, but certainly risks violating it in spirit. The chart below shows that beyond Q2 2017, Ukraine is facing pretty steep repayments of debt and there is absolutely no guarantee that by then Ukraine will be able to withstand this repayments cliff.

To further complicate issues, Ukrainian Parliament (Rada) passed a law last week that would hold off repayments of debt until there is an agreement with private holders on haircuts. This presents three key problems for Ukraine:

1. The law can be used to hold off on repaying Russian debt, which is not private by definition and as such will constitute a sovereign default on bilateral loans. This will be pretty much as ugly as it gets short of defaulting on IMF.
2. The law, if implemented, will also halt repayments on genuine private debt. Which will also constitute a default.
3. If Russia refuses to restructure its debt (for example, citing the fact that it is non-private debt), Rada law will have to be applied selectively (e.g. if Rada suspends repayments on Russian debt alone), which will strengthen Russian position in international courts.

In case of default, be it on Russian debt or on private debt, or both, Ukraine will see its foreign assets arrested. Which involves state enterprises-owned property, accounts etc. The reason for this is that Rada has no jurisdiction over laws governing these bonds, which are issued under English law. In addition, Ukrainian banks - big holders of Ukrainian Government debt - will be made insolvent overnight as the value of their assets (bonds) will collapse.

Final point is that ex-post application of the law, there will be no possibility for achieving any voluntary restructuring of debt as all negotiations will be terminated because Ukraine will be declared in a default.

While Greece continues to attract much of the media attention, the real crunch time is currently happening in Kiev and the outcome of this crisis is likely to have a significant impact across the international financial system, despite the fact that Ukraine is a relatively small minnow in the world of international finance.

Here is Euromoney Country Risk assessment of Ukrainian credit risks:

Ukraine score is 26.30 which ranks the country 147th in the world in creditworthiness.

22/9/2014: Where TLTROs dare to go?..

Last week I wrote about the disappointing nature of the first round of TLTROs by the ECB (http://trueeconomics.blogspot.ie/2014/09/1892014-quite-disappointing-tltro-round.html). Now, some more evidence that TLTROs are at best replacing / swapping liquidity in LTROs maturities without materially changing the nature of the banks assets holdings. Remember, the objective of TLTROs is to inject funds into corporate lending, not sustain or increase flows of funds into sovereign debt markets... which means sovereign yields should not be falling in connection to TLTROs.

So guess what's happening?

H/T for the chart to @DavidKeo

The chart above shows several things:

1. Both Spanish and Italian yields are falling across all maturities in excess of 1 year.
2. The margin from lending to the Spanish and Italian Governments (yield on bonds less cost of TLTRO funds) is lower across all maturities post TLTRO issue than before.
3. Margin declines are not uniform across maturities, and generally steeper at longer maturities. 

Are the banks taking up TLTROs pushing up prices of Government debt?.. That would mean more disconnection between the monetary policy objectives and outcomes, right?..

5/3/2014: Who Owns Emerging Market Government Debt: IMF Blog

An interesting breakdown of the ownership distribution of the emerging markets' Government debt via "The Trillion Dollar Question: Who Owns Emerging Market Government Debt" by Serkan Arslanapl and Takahiro Tsuda

Obviously, take a look at Ukraine and Russia. The core difference is that foreign official sector holdings of government debt for Ukraine are well in excess of those for Russia. Foreign non-bank holdings are also larger for Ukraine. Overall, half of Ukraine's Government debt is foreign-held, against around 1/5 for Russia. Last point, private domestic holdings of Government debt of Ukraine are tiny, at around 22-25% against Russia's 75% or so... Ukraine more closely resembles Argentina and Uruguay in this setting...