We’ve raised the possibility Greece’s sovereign debt burden is far lower than the headline figures — and the potential significance of this — in previous posts. Now it’s time to dig in.
(The idea was brought to our attention by Paul Kazarian, whose Japonica Partners has a position in Greek government bonds and would stand to profit from a compression in risk premiums. His interest in the outcome doesn’t necessarily mean he’s wrong.) Read more
Time is a flat circle, which is why the Greek government is set to run out of money before debt payments are due to the European Central Bank in July — just like last year, and despite last summer’s supposed deal between the Greek government and its various “official sector” creditors.
As before, the immediate cause of this latest crisis is the persistence of disagreements about the size of the budget surpluses (excluding interest) the Greek government is expected to generate, the specific “reforms” the government needs to implement, and the need for debt relief. The fundamental cause, however, is that the Greek government can’t raise money from the private sector at reasonable rates.
Why? Read more
Bankers are blaming tensions in the repo world on the increasing cost of renting out their balance sheets.
As we’ve broken down already, leverage and liquidity requirements make it harder than in the past for banks to borrow cheaply to buy (mostly) riskless and lend those same assets on at higher rates than they have to pay to their own creditors.
Which is another way of saying…new guys in the investment scheme don’t get to accrue the same rate of return from new asset purchases the early guys do unless the assets massively outperform, and hence are much more likely to run if and when these assets are priced below par value or start to outperform. Bitcoiners will, of course, know this as “early adopter syndrome”. For everyone else it amounts to the dynamics which drive debt overhang constraints. Read more
According to Nomura’s Nordvig and team “the EM [FX] debt bonanza is over”.
Which is nice if you thought it was a measure of building risk…
After three years (2012-2014) of very strong net issuance in emerging markets (around $250bn per year), issuance has dropped to much lower levels during 2015. Chinese entities managed to issue around $50bn in debt, mostly in the early part of the year, but net issuance in other emerging markets has essentially ground to a halt.
And here’s that paragraph, from JPM’s Niko Panigirtzoglou and team, with our emphasis:
- First, we disagree with the description that FX reserve depletion is QE in reverse. This is because the FX reserve depletion that is happening currently is not an exogenous policy action but represents a policy reaction to capital flows out of EM. But the capital that leaves EM does not disappear from the financial system. In fact, the capital that flows out of EM could find its way back into DM bonds. For example three major manifestations of capital flowing out of EM are 1) the reduction of dollar denominated debt previously issued by EM corporates, 2) the accumulation of dollar deposits by domestic EM corporates or other entities who try to protect themselves against further dollar appreciation, and 3) the withdrawal of EM currency (e.g. Renminbi deposits) by foreign investors who in turn convert them back into dollar deposits.
Suggestion for a new series: things Buiter said a while ago that we need to talk about again.
This time… the search for a nation state’s “comprehensive balance sheet”. Which is exactly what it sounds like: a plea to establish a realistic balance sheet full of contingent liabilities and properly valued assets.
The new thing this time is that we’re talking about this balance sheet alongside the idea that “governments across the world are either ignorant of the true value (or indeed the existence) of some of their most important assets – they often have actively tried to hide these assets and have been highly successful in doing so.” Read more
Some interesting stuff on corporate balance sheets from SocGen’s Albert Edwards on Wednesday.
Edwards observes, for example, that corporate leverage is finally recovering after a temporary retraction: