Whose Debt Am I?

From Peter Tchir of TF Market Advisors

First the EFSF had trouble raising money.  Then EIB spreads widened.  Then EXPT got crushed.  And now Germany struggled to raise money.

Is there a realization that all the quasi-sovereign debt and supranational debt is actually someone’s debt?  Is relying on implicit or explicit guarantees as a way to raise money indirectly over?  Guarantees do count.  AIG never “owned” any mortgages, all it did was write insurance or CDS contracts on them.  As investors get more concerned about sovereign credit and dig deeper, will some of these programs be tested?

So Whose Debt Am I?

Me and my “brother” have both received massive amounts of government bailout money.  We are due to get more.  Many never understood how we could have a public/private function, and only extreme policy wonks ever understood why both of us needed to exist.  We have had a Credit Event but didn’t restructure, still need more money quarter after quarter, and still don’t count against the debt ceiling limits because in spite of all of the government money, “technically” we aren’t fully guaranteed.  Combined we have over $1.5 trillion in debt.   We are Fannie and Freddie.

Until a month ago we were rated AA1 by Moody’s and now we are Ba1.  Our home is cold but full of oil.  Most people think our country will support us, but the country did set up a new export/import facility last week and our 5 year bonds dropped from 115 to 88 in a month.  Although profit hasn’t been our goal (we are cheap funding to enrich domestic businesses) we do spent time offering our rating to Wall Street firms that want to issue highly structured highly rated notes.  It keeps our funding extra cheap.  Our debt is at least $24 billion in total, but that may not include all the private placement structured notes we helped issue.  I am Eksportfinans (EXPT).

I am an insurance fund.  I don’t actually lend money, I just provide insurance on assets.  I am there to facilitate the housing industry.  I guess my two “siblings” for a lack of a better word, are better known than me, and have paid more out in bonuses, but I am not small.  I have to go to Congress (oops, did I say too much) and tell them that I may need billions of bailout money for my insurance portfolio.  My capital ratio is down to 0.24% instead of the mandated 2%.  You may not have heard of me, and I am small, but a few billion of capital will be needed and my insurance portfolio still won’t count as a US government obligation.  I have lasted longer than my private sector competitor PMI – which is well on its way to being dead.  I am the Federal Housing Administration’s Mortgage Insurance Fund.

I am AAA/Aaa rated.  I am great.  Recently the French wanted to increase my powers so I could rush to the rescue of Europe.  That has happened yet, but I expect my pristine credit rating will be used (or put to the test).  I have over $500 billion of debt outstanding.  I operate on a sliver of capital, make investments “towards financing capital projects according with the objectives of the [European] Union”.  As you can guess, we believe that the loans must be good, because when have politicians ever tried to direct money to bad or inefficient projects or provided capital far too cheap.  I know that most private investors would not make the loans we do, but that is because of our superior knowledge and formal process of requests that the “commercial” banks with a “profit motive” just cannot compete with.  Our 10 year bonds have dropped over 5 points in the past week, and our spreads have widened, but again that is because the market is wrong, and if our sliver of capital isn’t enough, we can surely rely on more money from our benefactors, because in spite of the fact that most of them are in trouble and are having difficulty raising money, they will surely want to ensure that I can continue to fund their pet projects and enrich the companies of their choice.  I am the European Investment Bank (EIB).

I too am AAA/Aaa rated.  My convoluted capital structure based on 3 tiers of guarantees (1 group guarantees but “steps” out, 1 group guarantees but has no hope of paying if called on, and 6 actual bona fide AAA guarantors [AAA for now]).  Spreads on existing debt have widened.  I have struggled to issue even a fraction of the $590 billion of risk I should be able to take.  I have travelled the world and the seven seas looking for money, but since I don’t actually have a product and am so far over my head, I had no success.  I believe that if we ever spend the time to decide what we are, we might be able to do what we are supposed to do, but let’s be honest, it is much more exciting to travel and meet heads of state than it is to read these endless pages of docs, most of which don’t let me do what I want.  I was scared that France was going to shift my power to the EIB, but I’m more comfortable now that they have the same problems we have so the politicians will keep us separate hoping no one figures out how similar we are, and how all of our debt really should count against the members.  I am the EFSF.

I am also AAA/Aaa.  Only about 50 people in the entire world can say my full name, and even fewer can spell it.  I am known only by my corporate bond ticker, which is good because I have issued $460 billion of debt.  Our mandate is to “operate as a promotional bank”.  If that doesn’t sound like profit is our motive, then you are absolutely correct.  I do have to admit, that I wasn’t entirely correct when I said we are only known by our ticker, I have heard rumors we are also referred to by Wall Street as “giant stuffee” which sounds harsh, but I think something must be lost in the translation.  We compete with the Landesbanken, who even we are confused what they do and how much government support they actually have, or why they exist, and if we are called “giant stuffee” they are often referred to as “uber stuffee” which makes us jealous.  It is very difficult to figure out how much government support the Landesbanken would get, but we are confident we have the full support of our country on our $460 billion of debt, but also that it shouldn’t count as country debt.  I am Kreditanstalt fuer Wiederaufbau (KFW).

I am a supranational that has not yet raised debt but it looks more and more likely that we will in the future.  We have a currency but no paper money.  I am a lawyer, but fit right in.  Without a doubt I am the strongest personality in international finance and the cameras love me.  I am convinced that our bonds would be rated AAA, though I have been told that since our guarantees come from countries that on average are below AAA and the funding would often be in currencies that aren’t there domestic currency, that our bonds may not achieve AAA.  People just don’t understand the good we do, and that good should be accounted for in our rating and yield for future issues.  It may seem “strange” that we are issuing bonds with guarantees because our member nations don’t have the money or don’t want to provide the money directly and this guarantee structure gets around it so nicely, I am annoyed that rating agencies and investors see through it so easily.  I do wish there were some problems in more exotic locales because I have been to all the European capitals so often it just doesn’t make it fun, and most of them annoyed me in my prior job – which although I am a laywer, was also in finance.  With potentially over $385 billion of money I can call on from member nations, I am sure I can use that money to raise our profile.  I am the IMF.

I am very small and even I don’t know why I exist.  I do something similar to at least one of the other guests, but guess my mandate is more “foreign” rather than domestic.  I only have $40 billion in debt, so I am the least of anyone’s problems, though I have seen a trend, where my backers overlap with the backers of EFSF, EIB, IMF, and KFW.  I am the European Bank for Reconstruction and Development (EBRD).

I think I exist, but am not actually sure.  A few weeks ago, it seemed like I was going to exist, but now that is in question.  If I am lucky and do actually come into existence, I will have $120 billion of money or guarantees or something to perform my function.  In my case, the weak form of guarantee doesn’t seem to be fixing the problems as my assigned recipient continues to see its credit spreads widen.  At the same time, the “donors” are reluctant to provide actual money in the belief that the markets can be fooled into thinking the guarantees work to solve the problem, but don’t count against them.  It doesn’t really make sense to me, but let’s be honest, I just want to be created and there are lots of powerful investment banks happy to have me join the family.  I am the Dexia bailout.

I hope this list isn’t just the tip of the Iceberg, but most of these entities have a very similar profile.  Very small actual capital but guarantees, or capital calls, or drawing rights, or merely implicit guarantees from basically the same group of nations.  Germany, which seems clean on its own debt, has KFW, the Landesbanks, and lots of European obligations on top of it.  The EXPT situation is testing the resolve of Norway.  That is particularly interesting since Norway itself seems in great shape, so letting EXPT dangle like this should be a warning to investors in other “supra” and “quasi” nationals.  I think EXPT bond are probably cheap here, but Norway is in a relatively strong position.   The super committee failed to do anything, and we move along, but at some point things like Fannie and Freddie may put pressure on our debt. 

It is time to be careful, because as all this debt is really sovereign debt in one form or another (I think I got close to $3 trillion pretty easily) and as rating agencies focus on it, expect downgrades, since the backers have deteriorated, and as investors focus on it, expect pressure on spreads of these entities, and the countries with the biggest obligations and commitments to them.


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