Thursday, January 25, 2007

Can't pay? Won't pay... watch the credit default swaps/ economist

oh boy. some sobering examples that the world is really awash with excess cash and that the protection/insurance from the swaps maybe not always be on top of things. here is another example of "junk bond schadenfreude" from eastern europe
oh mann! einmal mehr beispiele für eine welt in der einfach zu vile liquidität herrscht und risiken dadurch nicht wahr genommen werden. besonders schön zu sehen wie das mittel der "versicherung" gegen ausfälle die swaps anscheined längst nicht immer auf der höhe der zeit sind. ein weiteres beispiel aus osteuropa könnt beim link oben sehen.

In emerging markets, the bond-market dogs lose their bite

“WHEN I come back, I want to come back as the bond market, because then you can intimidate everybody,” said James Carville, Bill Clinton's political adviser, in the 1990s. But the “bond-market vigilantes” are not always as menacing as they once were.

Emerging-market governments now seem able to thumb their noses at investors. The latest is Ecuador, where the economy ministry has described some parts of its debt as “illegitimate” and hinted at repaying just 40% of the outstanding total

It is not that Ecuador lacks resources. Investors generally agree that any default would be the result of unwillingness, rather than inability, to pay. Standard & Poor's, a rating agency, said Ecuador had “one of the weakest payment cultures” of the 113 countries it monitors.

WOW!!!!!! more questions...?.....when this is "insurance" cost for one of the weakest players out there.......noch fragen? wenn das die versicherungskosten für den schwächsten schuldner überhaupt sind.... swaps, which insure the buyer against non-payment, traded as low as 270 basis points (hundredths of a percentage point) in August; they are now at 1,350 basis points.!!!!!!!

...... With returns on American Treasury bonds and high-grade debt too low to meet the needs of pension funds and endowments, they have to take more risks. ( is also true for almost every other asset class out there.../ gilt gleichermaßen für fast jede andere anlageklasse.......)

According to the Institute of International Finance (IIF), an international banking club, some $502 billion of private capital flowed into emerging markets last year, only slightly down on the $509 billion in 2005. The IIF predicts $469 billion of capital flows this year, which would be the third-highest level on record. (the liquidity has to go somewhere........)

Those flows reflect the general perception that emerging-market economies have improved substantially since the Asian crisis of 1997-98. Many developing countries are running current-account surpluses, in order to be less dependent on foreign capital than they were a decade ago.....
An element of moral hazard may have entered the equation. Argentina imposed a substantial default on its creditors five years ago. Its debt now yields a little above two percentage points more than American Treasury bonds; hardly a sign that it is a financial pariah. ....... (read this twice. wow! they are for sure fans of madness. (and some may have also alzheimer)....... wie kurz doch das gedächnis manchmal ist......sind bestimmt fans von madness darunter..einge evtl. mit alzheimer......:-)

This may reflect a change among investors. When the Latin American debt crisis broke in the 1980s, much of the debt was in the hands of Western banks. Given the importance of these banks to the financial system, there was a lot of political interest in ensuring that the loans were restructured. ( not so sure about this point about the "political interest" if not from government the central banks will take an important role. would be great but ltcm has shown that at least the fed is way too often willing to bail somebody out..../ bin mir da nicht so sicher. wäre fast sicher hilfreich. die geschichte zeigt allerdings das zumindest die fed bei der schieflage von ltcm sofort eingesprungen ist)
Now that debt is widely dispersed among hedge funds, pension funds and the rest, it may be harder for creditors to join ranks. And while one hedge fund may give up on Ecuador, another may see the crisis as a buying opportunity.

...... Ecuador's bonds were trading close to their face value in the spring of last year, according to PIMCO, a fund-management group; now the benchmark 2030 bond trades at only 70 cents to the dollar. Its credit-default swaps, which insure the buyer against non-payment, traded as low as 270 basis points (hundredths of a percentage point) in August; they are now at 1,350 basis points. (schadenfreude!)

Emerging-market investors also point out that Ecuador is a small country, in terms of both population and importance to financial markets. They argue it would be wrong to see it as a harbinger. So far there has been little sign of a “contagion effect” in other markets.

However, Richard Bernstein of Merrill Lynch likens risk to popcorn in a microwave. One kernel pops, but it seems to be an isolated event. Then another goes and another, until the entire bag is active. Ecuador is only the latest pop, following Thailand's botched capital controls, Venezuela's proposed nationalisations and sharp falls in commodity prices.

At some point, the credit cycle will turn and some emerging markets may regret “dissing” international investors when the going was good. .......( well, i think thet in the first place the investors of this bonds with only 2 points spread will regret the purchase.........../nun ja, ich denke das wohl zuallererst die käufer dieser anleihen die zu niuedrigen risikoaufschlägen gekauft haben das bereuen werden......
so just when you think that at least some riskpremiums are widening the next player steps in to fill the gap..... / so gerade wenn man denkt das zumindest ein teil der risikoaufschläge sich ausweiten kommt schon der nächste spieler und füllt die lücke
Nigerian bonds / No laughing matter
IF YOU had told an international banker a few years ago that Nigeria was preparing to issue bonds on the global market, he may well have laughed in your face. The banking sector was weak and fragmented and Nigeria's government was bogged down in fruitless negotiations over the billions of dollars of debt racked up during years of corrupt military rule.

But on January 22nd one of the country's main commercial banks issued a five-year Eurobond worth $350m at an interest rate of over 8%, and demand was high. It was the first time any Nigerian institution, private or public, had approached the international capital markets since the early 1990s. ...
The government is itself looking seriously at entering the Eurobond market this year, once important capital-market guidelines have been implemented, he says. The country should be able to take advantage of its lower debt profile after it finally succeeded in negotiating an $18 billion write-down from Paris Club lenders in return for a $12 billion settlement last year and announced plans to repay—through a complicated manoeuvre—its remaining London Club debt.......

Mr Muhtar says that Nigeria hopes to win better debt ratings from Standard & Poor's and Fitch. Both credit-rating agencies still place it a few notches below investment grade. The government is keen to place its own Eurobond so that it can offer investors a sovereign benchmark, against which other issuers are measured. It also wants to use debt to finance the country's pressing infrastructure needs without having to dip into its international reserves, valued at more than $40 billion. ( hey its always better to negotiate the debt when things go wrong.... when you can finance things to 8% its no wonder that nigeria is taking on debt. clever and a good move from nigeria (honestly) / kein wunder. wenn man sich zu 8% verschulden kann hat man wenn sachen nacher nicht gut laufen immer noch die möglichkeit die kredite zu verhandeln )

Despite the economy's progress, politics are likely to be the determining factor in Nigeria. It took the government of President Olusegun Obasanjo almost two terms in office to bring Nigeria's capital-market reforms this far. With national elections in April that are due to be hotly contested and Mr Obasanjo fully aware that politics could upset his economic reforms, international investors still have plenty to be nervous about. “We are keeping our fingers crossed,” says Mr Muhtar.

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Anonymous Anonymous said...

So, ummmm, if it's unwillingness to pay rather than inability to pay, what's stopping the Ecuadoran government from picking up some of their own bonds at a 30% discount?

7:30 AM  

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