Carmen Reinhart Warns "Serious Sovereign Debt Defaults" Are Looming
Authored by Carmen Reinhart, originally posted at Project Syndicate,
When it comes to sovereign debt, the term “default” is often misunderstood. It almost never entails the complete and permanent repudiation of the entire stock of debt; indeed, even some Czarist-era Russian bonds were eventually (if only partly) repaid after the 1917 revolution. Rather, non-payment – a “default,” according to credit-rating agencies, when it involves private creditors – typically spurs a conversation about debt restructuring, which can involve maturity extensions, coupon-payment cuts, grace periods, or face-value reductions (so-called “haircuts”).
If history is a guide, such conversations may be happening a lot in 2016.
Like so many other features of the global economy, debt accumulation and default tends to occur in cycles. Since 1800, the global economy has endured several such cycles, with the share of independent countries undergoing restructuring during any given year oscillating between zero and 50% (see figure). Whereas one- and two-decade lulls in defaults are not uncommon, each quiet spell has invariably been followed by a new wave of defaults.
The most recent default cycle includes the emerging-market debt crises of the 1980s and 1990s. Most countries resolved their external-debt problems by the mid-1990s, but a substantial share of countries in the lowest-income group remain in chronic arrears with their official creditors.
Like outright default or the restructuring of debts to official creditors, such arrears are often swept under the rug, possibly because they tend to involve low-income debtors and relatively small dollar amounts. But that does not negate their eventual capacity to help spur a new round of crises, when sovereigns who never quite got a handle on their debts are, say, met with unfavorable global conditions.
And, indeed, global economic conditions – such as commodity-price fluctuations and changes in interest rates by major economic powers such as the United States or China – play a major role in precipitating sovereign-debt crises. As my recent work with Vincent Reinhart and Christoph Trebesch reveals, peaks and troughs in the international capital-flow cycle are especially dangerous, with defaults proliferating at the end of a capital-inflow bonanza.
As 2016 begins, there are clear signs of serious debt/default squalls on the horizon. We can already see the first white-capped waves.
For some sovereigns, the main problem stems from internal debt dynamics. Ukraine’s situation is certainly precarious, though, given its unique drivers, it is probably best not to draw broader conclusions from its trajectory.
Greece’s situation, by contrast, is all too familiar. The government continued to accumulate debt until the burden was no longer sustainable. When the evidence of these excesses became overwhelming, new credit stopped flowing, making it impossible to service existing debts. Last July, in highly charged negotiations with its official creditors – the European Commission, the European Central Bank, and the International Monetary Fund – Greece defaulted on its obligations to the IMF. That makes Greece the first – and, so far, the only – advanced economy ever to do so.
But, as is so often the case, what happened was not a complete default so much as a step toward a new deal. Greece’s European partners eventually agreed to provide additional financial support, in exchange for a pledge from Greek Prime Minister Alexis Tsipras’s government to implement difficult structural reforms and deep budget cuts. Unfortunately, it seems that these measures did not so much resolve the Greek debt crisis as delay it.
Another economy in serious danger is the Commonwealth of Puerto Rico, which urgently needs a comprehensive restructuring of its $73 billion in sovereign debt. Recent agreements to restructure some debt are just the beginning; in fact, they are not even adequate to rule out an outright default.
It should be noted, however, that while such a “credit event” would obviously be a big problem, creditors may be overstating its potential external impacts. They like to warn that although Puerto Rico is a commonwealth, not a state, its failure to service its debts would set a bad precedent for US states and municipalities.
But that precedent was set a long time ago. In the 1840s, nine US states stopped servicing their debts. Some eventually settled at full value; others did so at a discount; and several more repudiated a portion of their debt altogether. In the 1870s, another round of defaults engulfed 11 states. West Virginia’s bout of default and restructuring lasted until 1919.
Some of the biggest risks lie in the emerging economies, which are suffering primarily from a sea change in the global economic environment. During China’s infrastructure boom, it was importing huge volumes of commodities, pushing up their prices and, in turn, growth in the world’s commodity exporters, including large emerging economies like Brazil. Add to that increased lending from China and huge capital inflows propelled by low US interest rates, and the emerging economies were thriving. The global economic crisis of 2008-2009 disrupted, but did not derail, this rapid growth, and emerging economies enjoyed an unusually crisis-free decade until early 2013.
But the US Federal Reserve’s move to increase interest rates, together with slowing growth (and, in turn, investment) in China and collapsing oil and commodity prices, has brought the capital inflow bonanza to a halt. Lately, many emerging-market currencies have slid sharply, increasing the cost of servicing external dollar debts. Export and public-sector revenues have declined, giving way to widening current-account and fiscal deficits. Growth and investment have slowed almost across the board.
From a historical perspective, the emerging economies seem to be headed toward a major crisis. Of course, they may prove more resilient than their predecessors. But we shouldn’t count on it.
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Just one of the many black swans likely to play out this year.
So that's why the Bible says the Sky will turn Dark.. All those Black Swans coming in for a Landing...
The event willl take place. Their is plenty of literature describing this. Also, by the NBER. The thing is timing. Ofcourse, I would like to believe that it will happen this year. I do not say that it will not not happen. However, predicting the future is hard. How often, did someone predicted the stock market crash? 2011, 2012, 2013, 2014, 2015 and 2016. There have always been someone telling that a catastrophyic event will takes place.
P.S. I hope that event takes place, because 2015 was a boring year.
Just Print ....
Extend and Pretend is the rule of the day. Consider the author's statement:
"Greece’s situation, by contrast, is all too familiar. The government continued to accumulate debt until the burden was no longer sustainable. When the evidence of these excesses became overwhelming, new credit stopped flowing, making it impossible to service existing debts."
Greece's problem was that it did not have control of the issuance of its currency. Before Greece adopted the Euro, it could just print moar Drachmas. Under the Euro, it could not "service" its debts without borrowing more.
The USA has no such problem, since the Fed will always "print" moar "Dollars" (Federal Reserve Notes) and lend them to the USA.
Note that Greece's problem, in the financial paradigm of today's World, is not that it borrowed more than it could service, but rather that it could not roll over its debts when due, by getting creditors to buy more bonds. The fact that nations owe far more than they can ever pay is not a problem (in today's FinanceThink) as long as they can borrow more to meet interest payments when due, either by payment or by rolling over the debts and the accumulated interest. The unsustainability of such a system is obvious to anyone who does not believe that nations can achieve parabolic GDP growth to infinity or that printing money is printing wealth.
So, roll it down the road, Extend and Pretend:
https://www.youtube.com/watch?v=RxdMqiKI08g
"The USA has no such problem, since the Fed will always "print" moar "Dollars" (Federal Reserve Notes) and lend them to the USA."
I know that this has been argued a thousand times by better,more informed minds than mine and capable of sustaining an articulate argument on one topic for more than a few minutes.
I heard a guest on an overnight talk show (probably Bohannan) say that without debt there would be no free range money.. The rest of the interview degraded quickly.
I thought about this simple statement and considered it true in our current situation.The days of having a skill, production output, child to sell, or clear assets that are directly fungible are long gone.
To have debt is to trust the future, and that concept is long gone from most of us as well.
Monetarised instruments are easier to convert to 0 s and 1s as well , easier to handle and transfer.
Coming down to trust again.
Much as I have daily contact with tens of people, I trust very few of them. I find that Trust with people who handle the monetary system has not been attempted with me, as inconsequential as I am.
This is a big short coming of the system going forward.
Furthermore, alot of news emphasizes on China. Is the data rigged or not!? I almost want to say look at the import and export numbers from surrounding countries: Taiwan, Thailand, Singapore etc. Import/Export is down more than 10% in a lot of the surrounding countries. Brazil its economy is also b00ming to the bottom... Argentina is interesting because after the accidental fires after the past presidential ellection.
In the book, The Big Short was writen that housing prices did not had to come down before people where about to default (or something, I cannot recall it precisily). However, prices only need to to rise less faster. It is clear that altough China is not in contraction. the non-double digit GDP clearly has an impact on the global economy.
Then we have Germany. I mean VW and Audi slashed their capex by a couple of billions. Mainstream media states that it does not have any effect on the country but it a falacy. Countries refure to import VWs. Furthremore there is a latency between a major event takes place and the impact occurs (There is a propagation time).
One final note. I read once in an paper that stock market crashes are contagious. It takes around half a year before surrounding countries start to come down. A stock market doesn't crash out of nothing. Billions of trillions of dollars will be evaporated. Where is smore is fire.
Don't forget your Chicago PMI of 42.9. Really, Obummer and Jannet Yellen saved the economy. Like Brazil, with such a PMI I would say that the economy is also b00ming to the bottom!
They keep talking about LDC like they have the economic power to knock the world on it's collectivist ass. When, in fact, they should be talking about the Developed Countries (US, Euro, etc) that are such transparent failures that black swans don't even apply. All it takes is just enough time.
Relocated my coins from the dry lake to the outhouse shithole. If they're coming for them I want to make them reallly work for it.
Carmen Reinhart? Carmen Reinhart . . .
Oh yeah . . . she was the ditzoid who royally screwed up that simple Excel spreadsheet (along with Rogoff at Harvard) then lied about it in attempting to cover her tracks.
Sure, I'd believe anything Reinhart had to say . . .
beautifully said. What's even more sad is that she's continuing to commit the same problems she and Rogoff committed previously. Namely, talking about sovereign default without mentioning whether or not these countries are issuers or users of currency, and whether or not they have a fixed or floating exchange rate. Morons, I tell you.
Carmen Reinhart Warns "Serious Sovereign Debt Defaults" Are Looming
I believe it, and the mediocre to terrible conditions in other countries will result in capital flowing into the USD and USD denominated assets, especially US Treasuries.
Obama's war on oil to hurt Russia has reduced oil revenues by about $3 trillion a year - that is about 5% of world GDP. There is a cascading effect on other commodities from lower oil prices. So basically, we have a Nobel Prize Winner induced massive deflation which is killing emerging markets.
Did the U.S. and the Saudis Conspire to Push Down Oil Prices?
Falling oil prices and the plunging ruble are not some kind of free market accident brought on by oversupply and weak demand. That’s baloney. They’re part of a broader geopolitical strategy to strangle the Russian economy, topple Putin, and establish US hegemony across the Asian landmass. It’s all part of Washington’s plan to maintain its top-spot as the world’s only superpower even though its economy is in irreversible decline.
http://www.globalresearch.ca/did-the-u-s-and-the-saudis-conspire-to-push...
Again...I post the following from...
https://www.linkedin.com/pulse/truly-big-shorts-john-m-cunningham
Regarding the U.S.
There is a a slow circling of the drain to use this author's words.
Carmen is right, and just because the soverign debt defaults are slow, it is deliberate and inevitable, they are the next catalyst.
The U.S. banks will be hit, the equities markets will be hit and all hell will break loose in the global Bond Market.
ZHer's must take action to protect themselves.
Or not.
Indeed, it takes sometime before it happens. In the meen time buy those FANGs and financial stocks helping you wait before the events takes place. It keeps you bussy ;-).
I say we vote Netflix off the island.
I have heard this shit for 10 years now! I do believe the message, but when is this fucking market going to puke up a lung or two???????
What you are seeing is mark to fantasy accounting that allows the banks to hide the extremely massive losses they have incurred in both CDS and their double down on commodities with all the free FED money.
That along with hedges allows them to survive and hide the loses. Right now you see some of the cracks that are occurring when the hedges are starting to come off and those who are running out of money having to shut down. A number of banks have already failed in Europe and they are already screwing the depositors with bail-ins ala Cypress. Commodities across the board are down 50% or more and many of the banks still hold oil at $100. Soon oil will be at $10. That loss by itself is a killer but imagine it with leverage.
The problem you have is when it goes, it is 10-20x bigger than 2008, it will go so fast that one day everything will be fine and literally the next your bank will be closed and your credit cards will not work.
Thus, anyone with half a brain needs to get their money out of the banks, and brokers, and Wall Street and put that money or even treasuries under your control (mattress or TreasuryDirect). That includes retirement accounts......everything.
More than 1/2 the banks will disappear and there may be a massive Revolution to retake the Government from the Progressive National Socialists.
You ALMOST get it, but you contradict yourself -- so, fail!!
Since the big US banks have been allowed to use mark to "model", they cannot fail. It is impossible. Under the old rules they would all be insolvent right now. But that is irrelevant now. Look at citi. It's essentially a zombie that will never be allowed to die.
Countries like italy, spain, france and japan may go "greece" over the next few decades. Until they do I have no fear of large problems in the us. In fact, the stress around the world always increases flows into the US dollar and stock/bond markets.
Yes, the cleanest dirty shirt, which I happen to agree with.
We trust you only slightly more than the commies' opaque economy numbers, is more like it.
And, "It is no sin to lie to an infidel" cuts a large swath out as well.
OR........
The RoW could be, right this minute as in prior dumps of WRCs, hedging their "bets" with BRIICS Bank and AIIB. You did see ALL of the UFSA's former allies joined AIIB as teh UFSA threatened them not to, right?
The world is very much changing. The Petro$, the UFSA's most critical weapon to preserve hegemony, is under full-frontal attack. China is forgiving foreign debts in order to establish Yuan-for-Oil trades formerly settled with Petro$.
I make no assertions as to when the Petro$ may be dethroned but when / if this occurs, the UFSA will no longer be the "cleanest dirty shirt" nor will times of World eCONomic stress mean capital inflows into the UFSA. Is THIS TIME - THE TIME?
I don't know but judging by the US MIC activity on the heels of our former allies bolting to AIIB, especially trying to make Putin out to be the aggressor in Ukraine after Nulands' Cookie Policy failed, sure makes me wonder. Thank Gawd Putin has shown more statesmanship than the US Pentagon and Obozo.
Will 2016 be the year of the default? Up til now the holes in the dike have been getting plugged. But will 2016 debt defaults trigger the hundredth monkey syndrome, whereby the dominoes start tipping uncontrollably as everyone jumps on the default bandwagon? Where the house of cards collapses under it own weight? Will counter-party default reach critical mass and spontaneously combust into a firestorm of repayment failure? Will the lithium battery of finance take on that one-too-many electrons of debt and burn down the whole system? Will the market react by freezing all financing as it flushes the low risk babies out with the no-longer-trusted bath water?
Tune in next year at the same batty time... same batty station...
What will happen when U.S. Fed defaults? Leveraged at 77:1 in 2014 (vs 33:1 for Lehman pre-collapse in 2007-2008):
http://greshams-law.com/wp-content/uploads/2012/02/Screen-shot-2012-02-1...
http://dealbook.nytimes.com/2014/06/27/feds-balance-sheet-punctuated-by-...
Whatever's gonna happen is one day closer.
Yeah, but the future ain't what it used to be.
You don't understand... this time is different.
I know, a nickel ain't worth a dime anymore.
"It's hard to make predictions...especially about the future."
the imf. getting blood out of a stone since 1945.
Don't get too excited. Remember how long Greece has survived in a state of bankruptcy. The can will be kicked down the road so far and for so long it will seem unbelievable. It will crash when the elite and powerful are ready for it to crash and not a moment sooner.
"Serious" points to major countries like Italy, Spain and Portugal. That would kill the Euro.
No it won't. They'll just let their banks use mark to model just like the big us banks have since 2009. Presto - everybody passes the capitalization tests, even though yesterday they had nothing in the vaults.
But Puerto Rico has a plan:
https://www.youtube.com/watch?v=DDIQNO8PS8M&feature=em-share_video_user
Trump has opined that a serious market crash is credible, see here
http://www.showrealhist.com/recDJIAtoRD.html
AND that it would fairer happen while Obama is still POTUS, rather than "two months" into a new Presidency. Hmmmmmmmmm...!
Oh if Bubba Trump said it than it must be true
speaking of mr darn-old trump; this is the guy who paid for the flying anti trump ad yesterday in caliphateornia
http://blog.al.com/.../tuscaloosa_developer_stan_pate.html
http://blog.al.com/.../talbot_alabama_gops_healing_pr.html
btw, the bold emphasis is not mine.
The banking crisis is back: Problems in Hungary and Portugal
German Economic News | Published: 12/31/15 01:56 Clock
Hungary and Portugal require higher capital buffers from their banks because of new risks. [Oh yeah ... these are completely "new risks" ... not the exact same risks ... oh noes! ... This time it's a different risk! ... would we lie? ... yeah ... right!] In Hungary, especially Austrian banks are affected. In Portugal Senior Bondholder must save the Novo Banco. This concerns mainly institutional investors from Europe.
Hungary's central bank calls from nine leading banks additional capital buffer. With the step Hungary would strengthen the financial system, the Central Bank of the Eastern European country said on Wednesday. The new requirements, banks should apply from January 2017th The banks were among others OTP Bank, HVB and UniCredit mother the two Austrian banks Raiffeisen and Erste. The additional capital buffer amounts to up to two percent of the exposures of the money the house concerned.
The systemically important banks in Portugal must in future also hold more capital. Central Bank of Portugal said on Tuesday, from January 2017 would have the most significant financial institutions of the Southern European country to increase the cushioning. The additional capital buffer amounts depending on the institution of between 0.25 percent to a percent of risk positions. For the largest listed bank in Portugal, Millennium, the buffer to 0.75 per cent has been set. Banco BPI and Santander Totta subsidiary would hold 0.5 percent.
Portugal had to save a few days ago for the second time within two years with billions expense to the taxpayer a bank. The tarnished Institute Banif is sold at government expense to the Spanish financial group Santander. His daughter Totta accepts Headquartered on the Atlantic island of Madeira money home for 150 million euros. At the same time, the relatively small bank receives a government capital injection of just under EUR 2.3 billion. The EU Commission approved this on Monday. "Banif has prepared many get government aid and is on its own not viable," said the European Commissioner Margrethe Vestager.
The new Socialist Prime Minister Antonio Costa said in a televised address, the cost to the taxpayer were "very high". 489 million euros came from the Portuguese bank funds, 1.77 billion euros from the state. It was legally but the only way to protect bank customers and to ensure the stability of the financial system. Already in 2014 the state had the second largest domestic monetary House Banco Espirito Santo save - with a total of 4.9 billion euros. It exists under the new name Novo Banco continue. Portugal had left the euro rescue only a year ago.
Banif has a market value of 91 million euros. The end of September amounted to six billion euro deposits. The Bank was advised to lurch after more than 700 million in loans - could not repay - granted by the State during the financial crisis. This therefore took over 60.5 percent of the shares. Santander buys only the healthy parts of Banif, the problematic parts are outsourced.
The Novo Banco has to be rescued by the senior bondholders themselves. It meets the following bonds:
Novo2
This applies especially institutional investors - so many European banks, as the table shows:
[graphic]
Portuguese Prime Minister António Costa has accused international donors failure in the monitoring of the financial system of his country. [oh right, so it's really someone else's fault and job to look after your banks... hahaha! ... the nerve of it!] The so-called troika of European Commission, European Central Bank (ECB) and International Monetary Fund IMF have overlooked serious problems in the banking sector, said the prime minister of the former Euro-crisis state of the newspaper Jornal de Notícias.
After the end of the EU rescue program for Portugal had two banks - Banco Espírito Santo (BES) and Banif -. Must be preserved by the state prior to the collapse "They did not put there looking where you would have to look," said the Socialist. The inspectors of the investors did a lot of time lost in order to review the finances of the government, the counties and the municipalities, but does not control the banking sector.
Portugal had been preserved with an auxiliary program of 78 billion euros of national bankruptcy 2011th But the country had to commit to drastic savings and insinuate his finances a control of the Troika.
ECB Vice President Vitor Constancio has the readiness of the European Central Bank (ECB) underpins its monetary policy if necessary continue to loosen in order to achieve the inflation target of just below two percent over the medium term. "We have certainly our tools that could help our to reach target, and if that should be necessary, we will also use " Constâncio said in pre-release interview the" Börsen-Zeitung ". Finally, the inflation rate in the euro zone at 0.2 percent.
The Governing Council had in early December to further ease its policy - although less strongly than expected. Economists and market players speculate now whether the Euro-keepers in 2016 reloading - while the US Federal Reserve has heralded the turnaround in interest rates.
Constancio said he hoped that the Euro-keepers "would have to change in the foreseeable future not back" its monetary policy. But was critical of the inflation outlook. Especially in view of the renewed decline in oil prices keep many observers, the ECB forecasts for inflation for too optimistic.
He also called for further steps towards integration in Europe: "The alternative would be to make the whole structure of Europe into question."
https://translate.googleusercontent.com/translate_c?depth=2&hl=en&ie=UTF...
-----
Get that?
"... THE NEW SOCIALIST PRIME MINISTER ANTONIO COSTA SAID IN A TELEVISED ADDRESS, THE COST TO THE TAXPAYER WERE "VERY HIGH". ..."
Of keeping bankrupt banking businesses, from simply being closed down, to prevent them from trading insolvent, and thereby harming everyone else. Instead EU politicians decided they would harm everyone more, and more directly, plus indirectly.
And then they get on their soap box and wax on about why they're constantly having to stanch this very puzzling rise in domestic 'extremism', lack of interest in participation, general disaffection, and the lack of support for almost all institutions and regulatory structures.
C. Reinhart, her husband and Trebesch are all neo-Keynesians and Statists. So why should we pay attention to this latest missive? Nothing that originates in that camp is true to the actuality of the real world. Let's face it, their work is grounded in anti-intellectualism and is, collectively, a lie.
I read the original article, un-ZH bold-faced edited, at Project Syndicate. Reinhart's presentation raises all kinds of questions about the study's validity. For example, why does the included Default Waves graph feature the referenced dashed-line about chronic in-arrears countries? It's a distraction that brings no insight to the reality of the situation. Furthermore, the Commonwealth of Puerto Rico is hardly an "emerging economy". Looking further, Ukraine's debt problem is backstopped by the IMF (implicitly by the USA) so that example also lacks validity.
An unscientific eyeball look at Reinhart's chart suggests that the percentage of countries in external default, currently about 10-11%, needs to drop into the plus/minus 5% area before a cycle upturn occurs. Globally, we are a long way from that 5% area.
It's about time that ZH abandons its romance with the Reinharts and their Keynesian Harvard buddies. If ZH needs click-bait, I'm sure in this age of blog aggregators that there are more intellectually interesting sites than those featuring Establishment-oriented writings.
OK, but they are not the only one's saying it.
Steve Keene is one among many persistently doing it, and pointing out the scale difference and international nature, rather than regional dynamics, in the debt levels, both private and public, compared to prior instances where a default spiral would have already occurred.
Michael Pettis (blog.mpettis.com) is another particularly explicit well argued example.
Reinhart's author buddy, Ken Rogoff, recommends doing away with cash...this is where these punks are coming from.
When debt problem is global, the can gets kicked around the globe. Still need a real catalyst.
Meredith Whitney must be spinning in her grave.
Markets can remain irrational longer than you can remain solvent. (but a little physical and a Glock can't hurt)
"Carmen Reinhart Warns "Serious Sovereign Debt Defaults" Are Looming"
everytime i see one of these type articles i expect stocks to shoot up the next business day
#DUANG
I love a default in the Morning !!
So,why is it then that the swap lines that The Fed has with various other Central Banks around the globe such a big secret and who is it that U.S. Dollars are propping up?Interesting that the same secrecy rules apply to Central Banks not being totally open to the public on their Gold hypothecation schemes between each other either.If both of those items were 100% transparent then we'd have a better financial system because everything would be out in the open.The ordinary working taxpayer must be honest,why then aren't Central Banks? And what gives them this right to oversee and finance endless crookedness in other banks and in financing endless debt in government ponzi-war schemes?You'd think that it was a governing banking mafia watching out for their lower government mafia brethen?
I think it easier to understand the activities of the central banks if one assumes that the central banks are the head organization of the banks. The only concern of the central banks is the wellbeing of the banking industry. They do not care about GDP, about employment levels and inflation. They work to avoid the collapse of the banking system and to protect the interest of the shareholders of the large banks. That's it, nothing else. The whole talk about the economy is only to disguise their real intentions. The central banks work in unison. If one central bank stops to buy government bonds or Apple shares the other on steps in. If one central bank decreases QE the other one increases QE. If you view it like this most or all of your question marks should go away.
"The only concern of the central banks is the wellbeing of the banking industry. They do not care about GDP, about employment levels and inflation."
exactly (except inflation which they lie about to further protect bankers and governments)
How Zero Hedge made me a millionaire - thank you ZH!