5 replies on “Why do sovereigns default and why don’t they default more often?”
“Of course, we already witnessed two formal debt restructurings by Greece in 2012 (involving both PSI and OSI), and a number of additional OSIs (through maturity lengthening and coupon reductions of officially held debt) in Ireland and Portugal. We think that more sovereign defaults, both involving PSI and OSI) are almost certain to follow. Not only are levels of public debt high and growth prospects relatively modest in many advanced economies.
More importantly, demands for public spending have also managed to continue to grow, even when the ability of governments to raise revenues efficiently started to decline, as social capital eroded. The political economy in many highly indebted advanced
economies also argues for a much higher future risk of debt restructuring, as disaffected voters, both in the periphery (austerity resistance) and in the core (bail-out resistance), resist making sacrifices for the benefit of making sovereign creditors (domestic and foreign) whole. A Santa Claus may sometimes appear, but we doubt that his gift sack will be big enough. We therefore expect that we will see at least a few more sovereign debt restructurings in the euro area in the next few years. When these occur, they would probably primarily take the form of a lengthening of maturities, with haircuts at most in coupon payments or interest rates and with possible
deferral of interest payments, but without face value haircuts. Such restructuring does, of course, involve an NPV loss or NPV haircut, but for reasons that are often hard to fathom (and that mainly seem to reflect poor auditing, accounting, accountability, regulatory and tax standards, rules and practices), many investors prefer between two
equal NPV haircuts the one with the lowest face value haircut. The logic of these ‘soft’ defaults will likely be pushed quite far, with some maturities promising to pay nothing forever, an instrument with full face value and zero NPV.”
I was looking at Australian 10 y bond yields in the FT and they are very similar to Irish 10 y yields.
Does Australia also have a zombie banking sector or are Irish yields trína chéile ?
@Seafoid
The following could be the part of the answer to low yields.
“Since 2010, the repatriation of periphery sovereign debt from the rest of the EU to the banks in the periphery has substantially increased the exposure of Euro Area periphery banks to their own sovereigns. The desire by core Euro Area banks to dispose of periphery sovereign debt meshed nicely with financial repression in the periphery, where officials (Ministries of Finance/Treasuries/National Central banks/National Supervisors and Regulators) forced their domestic banks to hold more domestic sovereign debt and at lower yields than they would have voluntarily, all in the name of funding the sovereign at affordable yields. One leg of the so-called sovereign-bank link (the financial repression of domestic banks to fund a domestic sovereign whose solvency was questionable) thus inevitably created another (the excessive exposure of domestic banks to the creditworthiness of the domestic sovereign).
Until the excessive concentration of holdings of high-risk sovereign debt in the balance sheets of Euro Area periphery and soft-core banks is remedied, either by spreading this risk voluntary by selling the debt to a wider range of private investors, or by socializing the risk, partly or completely, a sovereign default by a Euro Area member state could undermine the viability of Euro Area periphery banks and cause further systemic distress.”
I see today that Italian banks continue to load up on their sovereign debt but curiously the Spanish banks have been offloading. They must need the dosh.
Technically, at 165% GNP [almost 2 90s!], Ireland should default now …. and get the inevitable over with.
A simple statement along the lines of “We see no logical, moral, scientific or legal reason to impose the debts of the financial system on the Irish Citizenry.”
Primary deficit at end 2012 is about 8bn. Default,= about 15bn in expenditure cuts or tax – tomorrow loike. End of social democracy.
… somewhat difficult to claim an end for that which has yet to emerge!
5 replies on “Why do sovereigns default and why don’t they default more often?”
“Of course, we already witnessed two formal debt restructurings by Greece in 2012 (involving both PSI and OSI), and a number of additional OSIs (through maturity lengthening and coupon reductions of officially held debt) in Ireland and Portugal. We think that more sovereign defaults, both involving PSI and OSI) are almost certain to follow. Not only are levels of public debt high and growth prospects relatively modest in many advanced economies.
More importantly, demands for public spending have also managed to continue to grow, even when the ability of governments to raise revenues efficiently started to decline, as social capital eroded. The political economy in many highly indebted advanced
economies also argues for a much higher future risk of debt restructuring, as disaffected voters, both in the periphery (austerity resistance) and in the core (bail-out resistance), resist making sacrifices for the benefit of making sovereign creditors (domestic and foreign) whole. A Santa Claus may sometimes appear, but we doubt that his gift sack will be big enough. We therefore expect that we will see at least a few more sovereign debt restructurings in the euro area in the next few years. When these occur, they would probably primarily take the form of a lengthening of maturities, with haircuts at most in coupon payments or interest rates and with possible
deferral of interest payments, but without face value haircuts. Such restructuring does, of course, involve an NPV loss or NPV haircut, but for reasons that are often hard to fathom (and that mainly seem to reflect poor auditing, accounting, accountability, regulatory and tax standards, rules and practices), many investors prefer between two
equal NPV haircuts the one with the lowest face value haircut. The logic of these ‘soft’ defaults will likely be pushed quite far, with some maturities promising to pay nothing forever, an instrument with full face value and zero NPV.”
I was looking at Australian 10 y bond yields in the FT and they are very similar to Irish 10 y yields.
Does Australia also have a zombie banking sector or are Irish yields trína chéile ?
@Seafoid
The following could be the part of the answer to low yields.
“Since 2010, the repatriation of periphery sovereign debt from the rest of the EU to the banks in the periphery has substantially increased the exposure of Euro Area periphery banks to their own sovereigns. The desire by core Euro Area banks to dispose of periphery sovereign debt meshed nicely with financial repression in the periphery, where officials (Ministries of Finance/Treasuries/National Central banks/National Supervisors and Regulators) forced their domestic banks to hold more domestic sovereign debt and at lower yields than they would have voluntarily, all in the name of funding the sovereign at affordable yields. One leg of the so-called sovereign-bank link (the financial repression of domestic banks to fund a domestic sovereign whose solvency was questionable) thus inevitably created another (the excessive exposure of domestic banks to the creditworthiness of the domestic sovereign).
Until the excessive concentration of holdings of high-risk sovereign debt in the balance sheets of Euro Area periphery and soft-core banks is remedied, either by spreading this risk voluntary by selling the debt to a wider range of private investors, or by socializing the risk, partly or completely, a sovereign default by a Euro Area member state could undermine the viability of Euro Area periphery banks and cause further systemic distress.”
I see today that Italian banks continue to load up on their sovereign debt but curiously the Spanish banks have been offloading. They must need the dosh.
Technically, at 165% GNP [almost 2 90s!], Ireland should default now …. and get the inevitable over with.
A simple statement along the lines of “We see no logical, moral, scientific or legal reason to impose the debts of the financial system on the Irish Citizenry.”
Primary deficit at end 2012 is about 8bn. Default,= about 15bn in expenditure cuts or tax – tomorrow loike. End of social democracy.
… somewhat difficult to claim an end for that which has yet to emerge!