17/5/20: Sovereign Default Risks and COVID19

Euromoney is covering sovereign default risks in Latin America in the wake of COVID19, with a comment from myself: https://www.euromoney.com/article/b1320n1grh638l/argentinas-crisis-threatens-brazils-faltering-economy.

18/12/15: Ukraine Inches Even Closer to a Default

So, we have this:

Which means that Ukraine and Russia - so far - have failed to agree terms of debt restructuring. As a reminder, over the last few days, Ukraine and Russia were involved in a 'last minute' dialogue (via Germany) to resolve the issue.

Does this mean that Ukraine is now in a sovereign debt default? Technically - no. Ukraine will only be in a default after 10 days grace period expires, which means the parties to the talks still have 12 days to reach an agreement and avoid default.

Does this mean that Ukraine is now in breach of IMF lending criteria? Technically - no. IMF amended its own rules allowing lending to continue for countries in official sector default, as long as these countries continue to engage in debt restructuring negotiations with the lenders.

Can the two countries reach a deal in time to avoid official default? Unlikely: any deal between Russia and Ukraine (except for a deal that treats Russia under the same terms extended to private lenders - a deal that is simply unacceptable to Russia) will require approval of other (commercial) lenders under the agreement between commercial lenders and Ukraine struck earlier. There is simply not enough time to achieve such an approval, even assuming, there is a deal and the deal can be approved (both assumptions are quite a stretch).

Do both parties show will to negotiate in good faith? So far - no. Russian offer (see here) has been to restructure debt by extending repayment period (a real haircut absent nominal haircut, as far as I read this). The offer shifted Russian position in negotiations in the direction of Ukraine's position: from the opening position that the debt is official sector debt and thus should be repaid in full and in time. Ukraine's position has been to treat Russian debt equivalent to private sector debt and Ukraine (as far as public record goes) did not alter its position to move closer to Russian offer. Ukraine also deployed consistent rhetoric of "Our way or the highway" variety. In other words (I am willing to be corrected on this), Russia made insufficient step toward Ukraine, while Ukraine made no step toward Russian position whatsoever.

Note: my view has been (consistently over time) that Russia should restructure loans to Ukraine to a longer term, say 10-year, bond extended at original interest rate and allow for 2-3 years interest payments moratorium. Financially optimal solution would have been to impose a haircut on principal and extend maturity of the remaining balance. But, given Ukraine's failure to secure stronger restructuring with private sector lenders, this option is not available and is politically infeasible.

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.

19/7/2013: Detroit officially files for Chapter 9

So after much of prevarication and discussions with the unions (there always discussions with the unions involved), the City of Detroit has filed for Chapter 9 federal bankruptcy protection. Detroit recently missed USD40 million payment to its own pension system and has amassed estimated USD18.5-20 billion in long-term liabilities.

Washington Post has an excellent timeline on the crisis: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/07/18/detroit-just-filed-for-bankruptcy-heres-how-it-got-there/

The city has shrunk over the decades from over 1.8 million in 1950 Census to around 700,000 currently (2010 Census put Detroit population at 713,777). In 2000-2010 the city population fell by 25% with the city rankings in the US by population falling from 10th largest to 18th largest. Meanwhile the six-counties Metropolitan Detroit area population is healthy at 4.296 million and ranks 13th largest in the US.

Quote from the Washington Post: "The official unemployment is now 18.6 percent, and fewer than half of the city’s residents over the age of 16 are working. Per capita income is an extremely low $15,261 a year…"

And another quote: "“The city’s operations have become dysfunctional and wasteful after years of budgetary restrictions, mismanagement, crippling operational practices and, in some cases, indifference or corruption,” Orr wrote in May. “Outdated policies, work practices, procedures and systems must be improved consistent with best practices of 21st-century government.” (Detroit has been a one-party city run by Democrats since 1962.)"

A good compendium of information on Chapter 9 bankruptcy for the cities from the Business Inside here: http://www.businessinsider.com/municipal-bankruptcies-explained-2013-7

Apocalyptic imagery of the city: http://www.marchandmeffre.com/detroit/

And my earlier post on the lessons Detroit bankruptcy process offers in comparatives to Ireland's errors in relation to the banks crisis:
http://trueeconomics.blogspot.ie/2013/06/662013-detroit-is-about-to-go-bankrupt.html
As usual, this blog was ahead of the Irish news curve by a month...

Lastly, a ray of hope: http://www.businessinsider.com/after-filing-bankruptcy-detroit-is-on-the-verge-of-an-epic-comeback-2013-7

Which echoes some of my tweets on the subject (read from the bottom tweet up):

14/6/2013: Detroit suspends payments on unsecured debt

I recently wrote (albeit in distinct context) about Detroit's bankruptcy. Here's the latest on the saga:
http://www.bloomberg.com/news/2013-06-14/detroit-on-bankruptcy-s-brink-stops-paying-some-debts-orr-says.html

I love this city because it gave me (via Chicago) my greatest partner in the crime of life. And my students in Smurfit Graduate School of Business are certainly familiar with the imagery of the urban collapse from Detroit and Flint, Michigan on foot of my lecture notes slides penchant for dramatic photography.

Sadly, it is totally, comprehensively, irreparably destroyed. Its only hope is a structured and comprehensive default followed by a bottom-up restructuring of its economy, demographics, politics, policies and institutions. Let's hope Michigan State will not commit the errors committed by the Euro area 'leaders' in Greece, Ireland, Portugal, Cyprus, Spain, Italy...

6/6/2013: Detroit is about to go bankrupt... differently from the Irish banks

So who is to say sovereign (or rather quasi-sovereign) defaults are a rarity in fiscal + currency unions? Here's a story about forthcoming, well-flagged in advanced Chapter 9 bankruptcy for Detroit: http://www.theepochtimes.com/n3/93438-detroit-facing-chapter-9-bankruptcy/

And, guess what - the story is telling in more than just one context. The terms and conditions of the restructuring will be ugly, but manageable... And the sequencing of events is revealing:

• Step 1: Detroit had $15.7 billion debt load it cannot repay - diagnosis was set as insolvency. 
• Step 2: The city was taken over by the state of Michigan and emergency manager was appointed.
• Step 3: The state of Michigan needed a calm evaluation of the problem confirming the diagnosis of insolvency and it was deemed to be structural (economy suffering from unsustainable levels of unemployment, declining population, loss of revenues, etc, but also cost overruns).
• Step 4: Rating agencies dropped ratings on Detroit debt and debt limits kicked in before then.
• Step 5: Chapter 9 bankruptcy, forced deal with the unions and Financial Advisory Board was set up with very clear termination objectives.

The sequencing of events above is distinct from what has happened in the case of Ireland's banking crisis resolution, where the above steps were re-ordered as follows:

1. Steps 4 and 5 (resolution steps) took place ahead of any assessment and diagnosis postulation and confirmation (banks guarantee issuance)
2. Step 3 took place next in the form of PCARs assessments
3. Step 2 (takeover) took place only after the PCARs
4. Diagnosis was never fully correctly established - all banks, save for Anglo and INBS are still considered officially solvent
5. Step 5 never took place with exception of Anglo and INBS

In other words, we never created a security cordon around the banks that would have resulted in banks takeover prior to guarantees and recapitalisations and this has meant that the banks were always able to use the threat of disclosure of insolvency as the means for bargaining out improved position vis a vis the taxpayers. 

Best proof of this: at no point in time did the state of Michigan tell the markets or the nation or its own taxpayers that Detroit will never be allowed to go bust. In contrast, during 2008-2010 period, Irish Government repeatedly asserted that the banks will be provided all and any funding necessary to stay in business. 

8/3/2013: German Lawmaker Challenges Debt Restructuring for Ireland & Portugal

Not exactly good news, and not exactly earth-shattering either, but...
http://www.reuters.com/article/2013/03/07/eurozone-germany-bailouts-idUSL6N0BZI9320130307

The point worth raising is that if Enda & Co do achieve restructuring of our Troika loans, they would de facto deliver a restructuring of Ireland's super-sovereign debt. This raises a number of issues:

1. Why are we seeking restructuring super-senior sovereign debt ahead of seeking to restructure non-sovereign debt, such as, for example banks debts?
2. If restructuring were to materially impact our long-term debt profile by lowering the NPV of our debt, would this not qualify as a 'structured' or 'cooperative' default? I know - the matter here is not material, but rather a label, yet don't we have a Government that staunchly refuses to default on private debts assumed by the State and then goes for a default (or even quasi-default) on super-senior debt?

These questions closely relate to the work I have done over the recent years on Irish Government debt and most directly to my chapter in What if Ireland Defaults? (link the chapter in a working paper format here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1985617)