Sovereigns of fortune (a debtor’s prison break) | FT Alphaville

Sovereigns of fortune (a debtor’s prison break)

In 2008-2009, a sovereign crack commando unit was sent to debtor’s prison by a bond vigilante court for a crime they didn’t commit.

(Well, actually, private-sector balance sheet losses, exchange rate collapse, all sorts of dubious government decisions, that kind of thing — still hard to say who committed what, bit of a mess really.)

These sovereigns promptly escaped from a maximum-security stockade to the dollar bond issuance underground. Today, still wanted by the markets, they survive as sovereigns of fortune.

If you have a problem…

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Iceland is poised to raise up to $1bn in its first bond issue since the country’s banking sector collapsed in 2008, marking a step towards normalisation of its relations with international capital markets…

(First bond issue since 2006)


A benchmark dollar bond planned by Latvia will carry a 10-year tenor and will be sold this week, market sources said on Tuesday…

(And the first one for Latvia since 2008)


Dubai, buoyed by tightening spreads and an oversubscribed bond last week by its flagship carrier, plans to come to the market itself, with a potential benchmark dollar bond, leads said on Thursday…

(Only the second bond here since the Dubai World crisis)


Interesting coincidence, no? Even if it may just be coincidence, it’s also very timely now that the eurozone periphery is going well off markets, for a long, long time.

The three countries who really started the sovereign debt crisis coming back to issue bonds in force, within a week of each other after months — years — of not showing up. This is like waiting for London buses.

Above all, while two of these countries did have to stay out of the market for a long time, none of the three ever went into sovereign default, despite the risk initially shoved onto their plate by their respective private sectors. So it’s a watershed for a certain, and relatively successful, kind of debt restructuring — restructuring of private creditor claims first, and avoiding the kind of sovereign banking loop seen in Europe.

Buyers of the above bonds have to hope that the debt restructuring will wind down from this point onward. But then, anyone looking at (say) Ireland or Spain has to realise that the chance for a similar debt restructuring has been and gone.

Well, Iceland-Latvia-Dubai credit spreads are winding down these days, and that is one overall reason why the sovereigns are coming back onto market now.

Here’s a CDS chart courtesy of Markit’s Lisa Pollack:

In fact, Latvia and Iceland CDS regularly trade inside Spain, while bond spreads for Dubai including government-related firms have rallied hugely over 2011. Although obviously, you can expect the spreads to change as markets digest and hedge these new issues, particularly Latvia’s where the new dollar bond will go towards paying off its IMF loans. (Also, apropos of nothing really, but we should point out Latvia CDS traded at 9bps before the crisis…)

Is all this implied optimism justified?

Iceland is famous now for restructuring its banks and burning holders of their debt quite soon after the 2008 blow-up. On the other hand, even the central bank thinks it’s taken a long time to restructure or deleverage bad loans in the private sector. In fact, almost a third of Icelandic households have NPLs. To an extent, everything has been massaged by the huge devaluation in the Icelandic krona since 2008, frozen in place by capital controls. It’s not clear where the currency, or the controls, or loans, go next and this is all coming to a head just as Iceland goes to the market.

A little bit like Iceland, Latvia forced work-outs of FX loans at initial stages of its crisis and basically held on while its property market experienced the biggest price declines anywhere in the world. But again, there’s a debate about the role played by the country’s peg to the euro, with Nomura arguing stuff like this:

Latvia‘s currency peg to the euro – despite everything going on in the currency – has been a key stabilising factor. At the height of the crisis, the aim of eventual euro adoption was a key credibility anchor in investors‘ minds. If this now becomes doubtful, exacerbated by any deterioration in the situation in periphery Europe, the peg may come under renewed stress, further hampering the economy‘s recovery, and the credibility of the euro as Latvia‘s long-run anchor would slip…

And Paul Krugman, er, being very Paul Krugman about the sustainability of internal devaluation.

Dubai is a weird one. As we saw, it restructured bank loans to troubled government-related enterprises but not bondholders, while taking advantage of an implied guarantee of its debt by the United Arab Emirates. It’s nowhere near clear whether NPLs have approached a peak or how much debt is really on the Dubai Inc. balance sheet.

So there’s a lot riding on these three bond issues, but they’re all routes from the same goal: sovereigns using goodwill generated by private restructuring to get issuance out. It certainly shows up the reverse situation now arising in the eurozone periphery, who have bought a one-way ticket to debtor’s prison.

Quite possibly it’s the eye of the storm if future losses are on the way in any case — and a Greek default could, ironically, destroy investor appetite for any risky sovereign debt — but we suppose you can’t blame these three issuers for trying.

After all, FT Alphaville love it when a plan comes together.

Related links:
Debtor’s Prison – Robert Kuttner /American Prospect
Iceland vs Greece – FT Alphaville
Greek bank risk — another New Europe tour – FT Alphaville