Friday, July 4, 2008

Sovereign Debt Risk

"Optimists say that emerging-market defaults are a thing of the past. ... Already a good share of Argentina's debt is in default. What else do you call it when a government owes over $30 billion in inflation-indexed debt manipulates its consumer-price statistics? Through a variety of crude measures (such as firing its top statisticians), the government is publishing an understated inflation rate that is used for calculating indexation payments. The official inflation rate in Argentina for the past 12 months is under 10%. But the true inflation rate appears to be at least 30%, according to virtually every neutral source. Fudging indexation clauses to effectively default on debt is an old game. ... Considering the duress of domestic bond holders across the world as global inflation rises, it is surprising that both private investors and multilateral international financial institutions seem so complacent about the rising risks of defaults on external debts", Carmen Reinhart and Kenneth Rogoff (R&R) at the WSJ, 24 June 2008.

R&R, welcome aboard. Now Kenny, apply your thinking to Uncle Sam's debt, see my 14 June 2008 post, where you failed to see what's primarily responsible for the commodities boom. See also my 30 January and 24 April 2008 posts. Kenny, do you think Unc has a "Plan"? How will Unc pay his $9 trillion national and $53 trillion actuarial debts? Will we have 165,000% inflation as the Houston Chronicle, 26 June 2008, reports in Zimbabwe? I doubt it. But a decade of 10-15% inflation as say John Williams might report it at, with "CPI inflation" of 4-6% would reduce Unc's real debt burden by: 48% (1.12 to the tenth is 3.11; 1.05 to the tenth, 1.63; 1.63 / 3.11 = .52, 1- .52 = .48), not enough. The "spread" between "real" and "nominal" inflation must be greater to effect say an 80-90% reduction in the real value of Unc's debts. Alternatively, Unc's "installment plan default" could go on for decades. A 20% spread, like in Argentina, would reduce the real value of Unc's debts by about 84% after a decade; now that's more like it! See my 29 May 2008 post mentioning Walter Wriston.

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