03 01 10 eotm appendix
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8/14/2019 03 01 10 EOTM Appendix
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Sovereign default time capsule: what people were saying in real time as debt and currency crises played outFrom the unthinkable, to the possible, the unavoidable, the actual and finally, the patently obvious
March 1, 2010
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90100
110
120
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04Source: Bloomberg.
Argentina
Sovereign debt price: 113/8
2017
“Argentina may save $13 bnover 5 years in bond swap”– Bloomberg [05/01]
“Argentina bonds gainedon increased optimism theIMF will approve additionalfinancing to help avoiddefault”- Bloomberg [08/01]
Banks, the IMF, IADB and Spainpromise $40 bn in aid. “This shouldimprove the investment climate, andtogether with enhanced domestic andexternal confidence, lay the groundfor sustained economic Argentinegrowth” – IMF Managing Director[12/00]
“The pressure has come off Argentina” – BearStearns Senior International Economist [01/01]
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3
4
5
6
7
8
Apr-93 Sep-93 Mar-94 Sep-94 Mar-95 Sep-95 Mar-96
Source: Bloomberg.
Mexico
Peso/USD
Creation of permanent $6.7 bnline of credit for Mexico from theUnited States and Canada [4/94]
Treasury Secretary RobertRubin, to Senate ForeignRelations Committee: “lowprobability event that fewcould have anticipated” [4/95]
“The danger of a breakdown of the Peso is pretty much gone. There isnot much to worry about, this thing is rock solid” Head of EM Research,Bear Stearns & Co [8/93]
“There’s no other country in theworld where I can buy Gov’tsecurities that yield so much andare safe”…“I’m as convinced as Ican be that the risk of an overnightmajor devaluation is extremelysmall.” – Fidelity PortfolioManager, [4/93]
Creation of $20 bn ExchangeStabilization Fund [2/95]
40
50
60
70
80
90
100
Mar-98 Apr-98 May-98 Jun-98 Jul-98
Source: Bloomberg, International Monetary Fund.
Russia
Sovereign debt price: GKO 3/10/1999
“Russia doesn’t need a bailout; an IMF loan is just to restore marketconfidence.” “There’s no comparison to Mexico, which had
fundamental reasons to have a cheaper currency. It had a balance ofpayments problem and current account problem. Russia doesn’t”– ANZ Research [06/98] Russia stocks and bonds soared after
the promise of $22.6 bn in loans ledby the IMF – Bloomberg [07/98]
“This takes the pressure off, and Russia can nowtrade on its own fundamentals” – Hermitage RussiaFund [07/98] “Russia looks extremely appealing, asthe announcement represents a massive boost ofconfidence” – Troika Dialog Fund [07/98]
For many years, Argentina was the darling of globalbond investors, with the largest weight (25%) in theEmerging Markets Bond Index, and very tight credispreads. The country had a surplus of Chicago-trained
government economists, and many supporters of itsorthodox currency convertibility program (1 peso=$1):“There’s no sense in attacking the Peso, as the Central
Bank has the reserves to back every bill in circulation
and is in a position to satisfy all the demand for foreign
currency” – Templeton Asset Management, in August
1998. Argentine politicians said they would “dollarize”before surrendering to a devaluation, a plan supported bthe Dallas Federal Reserve.
Deflation was too painful to sustain, and Argentina didnot deliver low fiscal deficits that convertibility requireThe aftermath: convertibility collapsed, the Argentinepeso fell by 75%, and Argentina defaulted on its bondsits 5th default since the creation of Argentina in the 182
Russia engendered a peculiar brand of Stockholm’ssyndrome. Its most ardent supporters were virulent aboits infallibility, despite Russia’s limited history of industrial capitalism (compared to Eastern Europe).
Foreign capital flooded into Russian domestic debt($30 bn, an example of which is shown in the GKOchart), restructured Soviet era debt (another $30 bnand its Eurobonds.
Russia collapsed for similar reasons the others did: fixeexchange rates, deteriorating terms of trade, insufficienreturn on foreign capital, etc. The Ruble fell by 75%once the currency peg broke.
Most bizarre moment of 1998: when the former head the IMF Capital Markets Group, then a strategist atDeutsche Bank, said on a conference call that he was soconfident in Russia that he would put his own daughtereducation money in the GKO market.
Mexico had convinced investors in the survivability of “crawling peg” exchange rate regime, established in1989. Investors responded with a whopping $50billion in short term investments in government bon(Cetes, Tesebonos, Ajustabonos, Bondes, etc). Offshore investors actually tripled their holdings in 199 just as the pressure started building. The quotes shownare indicative of consensus views investors had in
Mexico’s economy and currency.But Mexico could not generate the competitiveness,export growth and low inflation to back up a currencylinked to the dollar. The Peso collapsed by more than50% after it broke, despite the presence of large creditlines created both before the peg was abandoned, andshortly thereafter.
8/14/2019 03 01 10 EOTM Appendix
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Sovereign default time capsule: what people were saying in real time as debt and currency crises played outFrom the unthinkable, to the possible, the unavoidable, the actual and finally, the patently obvious
March 1, 2010
20
30
40
50
60
70
80
90
100
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09
Source: Bloomberg.
Dubai (Nakheel)
Nakheel Develop 2 Ltd debt price: 22/4
01/11
“Dubai World and its advisors areclose to a deal to ease theconglomerate’s $20 bn debt
burden” – Bloomberg[10/09]
“Nakheel bonds posted their largest gain since February afterSheikh Mohammed bin Rashid, the Ruler of Dubai and VicePresident of the UAE, said he was not worried about the emirate’sdebt burden. Nakheel could draw on funds from a $20bn bondprogram that Dubai launched in February” – Bloomberg [09/09]
“Demand for property willcontinue to outstrip supply until
2010, sustaining growth until theend of the decade”. Demandsustained by population growthand rising living space per personMiddle East Economic Digest[06/07]
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4050
60
70
80
90
100
110
120
Dec-95 May-96 Oct-96 Mar-97 Aug-97 Jan-98 Jun-98Source: Bloomberg.
Indonesia
Sovereign debt price: 73/4
2006“Although the entire East Asian experience gives ground for optimismover the prospects for development, that is particularly true of Malaysia,Indonesia and Thailand” – IMF Director on the Pacific Rim, [10/96]
“We’ve been very impressedby the negotiations with the
new Cabinet” – IMF [04/98]
“Most Asian currencies are pegged directlyto the dollar or to a basket of currencies.That means U.S. investors don't have todon't have todon't have todon't have toworry muchworry muchworry muchworry much about currency risk in thesecountries”...“In situations like Mexico’s,where there is a cascading disorderlydevaluation, that the currency exposure
becomes a real negative.” “I’d invest almosthalf [a portfolio] in emerging Asian equitymarkets” - Morgan Stanley Strategist inFortune Magazine [12/95]
IMF likely to resumelending under $40 bn
package [04/98]
0
20
40
60
80
100
Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03
Source: Gerson Lehman Group.
ChinaGuangdong International Trust & Investment Corp debt price
“Comfort letters” indicatestate “support” for loans tocompanies such as GITIC
“The [Chinese Supreme] Court determinedthat most, in not all, of the governmental
organizations has issued the [loan]guarantees illegally“ - Multinational
Business Review [Spring 2003]
Money poured into Dubai, financing a construction boomof incredible proportions. As shown in a prior EoTM,Dubai construction was not only larger than China’sShanghai/Pudong boom on a per capita basis, but on a
absolute basis as well. Many investors believed that AbDhabi would bail everything out in the end, to avoiddisruption to the broader region. Moral hazard argumentlike this don’t always work; they certainly don’t appear tbe working for holders of Nakheel bonds.
This is in essence a sovereign event, rather than acorporate one. Dubai World, which owns Nakheel,represents more than 2/3 of Dubai’s $80 bn in externaldebt.
Paul Krugman started a debate about Asian growthin 1993 with “The Myth of Asia’s Miracle”. Hisconclusions on productivity differentials are still hotlydebated, but a few things are clear:* Overvalued currencies made exporting more difficult* Fixed FX rates allowed Asian companies to borrowUS$, without sufficient FX revenue to repay them* There was an emphasis on consumption overinvestment (reflected in growing current accountdeficits), and a lot of foreign capital was diverted tocommercial property
There are a few similarities here with Greece andSpain. Note that a lot of these capital inflows into Asiatook place just 2-3 years after the implosion of Mexico.Investors believed that faster growing and more stableeconomies would not present the same kind of risks asMexico. Asian equities fell by 66% in 1998, andcurrencies like the Indonesian Rupiah fell by 80%.
The China GITIC episode is reminiscent in some waysof Dubai Ports, Abu Dhabi, etc. Foreign capital made itsway into Chinese Trust Companies out of the notion thatChina would always make good on Trust Companydebts, if they went bad. After all, why would China
jeopardize inflows at a time of desperately neededforeign capital? Well, they did: GITIC defaulted on its$3 bn in Eurobonds, Yankee bonds (offered in the US)and Samurai bonds (sold in Japan) despite its status as astate-owned enterprise. The bankruptcy process wasopaque, and witnessed the “disappearance” of certainassets, as they were related to sectors that were off-limitsto foreign investors without special licenses.
Michael CembalesChief Investment Officer
J.P. Morgan Private Bank
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Sovereign default time capsule: what people were saying in real time as debt and currency crises played outFrom the unthinkable, to the possible, the unavoidable, the actual and finally, the patently obvious
March 1, 2010
All the quotations included herein were drawn from public sources and are available upon request, including Bloomberg News, the Ne
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