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Presenting The Sovereign Default Equivalent Of The "Hindenburg Omen"
While the merits of its conclusion are at best questionable, and at worst, completely worthless, the IMF study presented earlier provides one statistical curiosity vis-a-vis sovereign defaults. Specifically, in "Default in Today's Advanced Economies: Unnecessary, Undesirable, and Unlikely" the author Carlo Cottarelli presents an observation which could be classified as a "Hindenburg Omen" type of signal for sovereign default. Unlike the real H.O. observation (which incidentally has now been experienced 5 times in the past three weeks) for stocks, the one relevant for sovereign bankruptcy has a much simpler gating threshold: 1,000 bps spread in credit risk. And just like in the Hindenburg Omen, this is a necessary (but not sufficient) condition for a crash: only in this case it is not the market that collapses, but a country's solvency. Cottarelli finds that since the first Brady deals in 1991-92 there are 36 instances in which a country’s spreads rose above 1,000 basis points. "Of those instances, seven eventually resulted in default; in the remaining 29 cases, however, the spreads stayed high for a few months and eventually fell back well below 1,000 basis points, with no default." The 1,000 is logically an inverse gating factor: no single country defaulted with spreads being below the 1,000 threshold. In other words, once a country passes 1,000 bps, it has a one in five chance of defaulting, roughly in line with the crash expectations of the traditional Hindenburg Omen.
This is visualized on the following charts:
Some more observations from the IMF:
Absence of default does not always mean smooth sailing: many of the countries experiencing high spreads required support from the international community, including large-scale IMF-supported programs. But the point here is that default was avoided in the majority of instances initially identified by markets as warranting bond spreads in excess of 1,000 basis points.
The list of prominent averted defaults includes, for example, Mexico (1994–95), Korea (1997), Brazil (1998–99 and 2002) and Turkey (2000–01). Brazil in 2002 provides the clearest illustration of default fighting. With high and growing debt ratios, political uncertainty, and a difficult international environment, sovereign bond spreads surpassed 2,000 basis points in the summer and fall of 2002. Yet, with fiscal effort, help from the international financial institutions, and the gradual establishment of a new policy track record, the spreads eventually fell below 500 basis points by late 2003 and declined further in later years.
Of course, the higher the sovereign spreads rise, the greater the proportional default possibility. We would be more curious to find out what the definitive threshold is beyond which a default inevitably follows. Furthermore, with Greece constantly flirting with the 1,000 spread, one would think the country only has a one in five chance of defaulting, yet in reality it would be long bankrupt were it not for the endless intervention of the IMF, ECB, EU and the Fed. And a more philosophical question: in this world of central (bank) planning do risk spreads even mean anything. In fact, is price discovery relevant at all when the Fed's tentacles reach out to every asset class? And taking the philosophical question to the extra difficulty level, one may ask, does anything have value when the Central Bank backs it up and what happens to "value" when the CBs finally withdraw, either voluntarily or involuntarily.
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The US can't default, we'll just inflate away into thin air. I'm bored with this article and moving on.
http://2.bp.blogspot.com/_zjDy1gh_tFc/S43uksTAgQI/AAAAAAAAAGw/U4CTec_un8U/s1600-h/IGS+blimp+crash.jpg
What you get when you inflate away to thin air.
Is that the "Soft Landing" they have been promising us?
Can he do that??
Darkmath : Are you aware that there are countries in the world other than the USA?
I'm sure that he is aware of other countries, but probably recognizes (and rightly so) that they don't matter.
God/USA/Bankers/Republicans/2012
and that attitude is exactly why you have got such a bad fall coming.
talk about looking the wrong way when you cross the road.
oh, and because no one else has yet..
Sovereignburger bitchez.
With a side of pommes death frites?
Really? Is that what happens? And the bond market does what exactly when it smells your inflation coming?
Funny that you're "bored" with your Econ 101 understanding of how inflation works.
Looks like an EKG of a sedentary man stuffing his face with pork rinds.
Artery is going to pop sooner or later.
And Doctor Bernanke has prescribed the Atkins Diet for us.
Maybe we should be asking the question have we ever seen so many countries in the first world in danger of default,how the knock on effect will effect other similar countries and also in a world where consumer demand and spending is not rising due to employment loss,debt and deficit, which countries are really immune and safe anymore.
I have a nastier word to whisper in your ear: Derivates.
I'd expect an emergency G20 (or so) meeting and an announcement that "under extreme conditions" derivatives on sovereign debt will be declared void under the law of such countries. Nothing less.
"derivatives on sovereign debt will be declared void"
I hope not. The patience of a soverign bear needs to be rewarded. And a country doesn't actually have to default to book a profit, right? It's a win-win.
You want every county in the world to agree what a derivitive is and then ban it?
Assuming you achieve that, there might be a slight M3 knock-on effect when people can't insure investments.
NO!, only the few countries in the treaty and only derivatives on sovereign debt of each and under the law of each of those countries. Read again my post.
There may be a door if you actually have possession of the debt and to the extend the insurer is able to pay. It is *your* responsability to check the insurer anyway.
Getting popular approval against "evil speculators" ruining the country is quite easy... such law/decree will pass, never mind who *actually* ruined it.
An avatar named MsCreant whispered nasty words in my ear. bad thoughts, bad thoughts.
I get the gist but is that French or Greek ?
No sweat. Lot's of free cash is on the way! Never in history have so many nations been bankrupt at the same time.
Multi-sovereign default in unison... should be fun to watch how they are going to pull it off and save the banks at the same time.
Boom Boom out go the lights.
http://video.google.com/videoplay?docid=-1220885932842881688#
The IMF is the same crew of mental cases that sell gold bullion, just to go throw the the proceeding fiat onto the same pile that they got for nothing from banana ben the day before.
+1. Maybe they were paid in renminbis, the greater of the two fiats?
Defaults are so passe. All we care about is free moneyyyyyy!!!!
Br'er Rabbit and the tar baby comes to mind ...
Sometimes it's what is not said that says more than what is said.
The impression left is that in 29 cases, they were able to put Humpty Dumpty back together again and they all lived happily ever after. While I have no actual knowledge of what transpired in those 29 cases, one might hazard the guess that either massive inflation followed or crushing debt was paid off over the next few years or decades and in general the standard of living was lowered among the many to pay off the few.
Same ole same old.
can you "short" a country or bet on a default?
id like to know how
LMAO, the summary:
Um, yeah, dude. Don't bogart that joint.
..
Country Broke
Stock Market moving up in jubilation.
Monopoly money being used to fool those who remain to be fooled.
The HO and the 1K bps spread each might indicate that something untoward is approaching, but they mean different unpleasantries.The meaning of the HO is becoming diluted as it enters common parlance. It is important to understand what the HO methodology indicates: when new highs reach above a certain threshold,a nd new lows reach above a certain threshold, there is a likelihood of a crash. But what crashes are the issues which have reached the new highs. The point of the HO is that the new highs are misleading investors, and they soon will be dropping towards the new lows, which are already there. If the HO and 1K bps were analogous, the sovereigns with the lowest yields would plummet. The 1K bps indicator says something different: it posits that the 1K bps countries will default. The parallel in equities would be that the new lows were likely to be delisted (while the 'new highs' group kept on keeping on. This is a distinction with an important difference. Nevertheless, I myself would use the HO in headlines whenever I could wedge it in. Currently, it attracts.
We are not comparing gating factors as the two are obviously completely different. The only observation was the sequence of if X then Y (Z% of the time). But yes, you understand the logic of the H.O. as it pertains to stocks quite well.
An inverse relationship, a 69 if you will.
Hate to state the obvious, but all countries wind up eventually defaulting on debt. Some hang in longer than others, but it's just a matter of time. Egyptian, Roman, Greek, British, Spanish, French, German, Russian, name the empire, they busted. We will too. You have to if interest is paid on borrowed money, no way out.
That second chart should have a label warning the viewer that attempting to differentiate individual plots can cause colour blindness.
Regards
Greece is Sliding into Deflation as Sales Go Down Despite Discounts
http://israelfinancialexpert.blogspot.com/2010/09/coming-euro-collapse-greece-is-sliding.html
Is there any differentiation in the IMF report between countries with their own currency and those without? Being close to default would normally sink your currency, reduce imports, expand exports and thus get you out of trouble. Not so with the Eurozone countries - they have to take the devaluation over the pay check. If you're an old communist state - maybe you can do it (Latvia, Estonia). If you're Greece or Spain etc, you get civil unrest.
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