Monday, 4 June 2018

Barbados defaults. Didnt Reinhart and Rogoff say these come in cycles?

As Barbados defaults, didn't Reinhart and Rogoff say EM defaults come in cycles? We have have Puerto Rico, US Virgin Islands, Mozambique, Vene in external debt and ongoing problems in other countries or even in US states such as Connecticut and Illinois. Plus local currency devaluations in Argentina, Turkey and other EM countries. 

In many cases, obvious economic reforms have been blocked by vested interests and corrupt politicians, in some cases western owned firms have been instrumental in blocking the reforms. 

A default and reform programme can be a catalyst to implement these reforms. Using PREPA the Puerto Rico power authority as an example. The bond holders are calling to be made whole. But their underlyig generation assets are obsolete oil burners, the cheapest source of power in Puerto Rico now is solar with storage and FEMA is due to pay for the repair and upgrading of the Hurricane damaged transmission infrastructure. As far as I can see the PREPA bonds are worth little to nothing, but the bond holders are tryig to enforce price extortion on the islanders to recoup bond holder losses. 

Or in the case of Vene, jwhen you default, instead of reforming, you just knuckle down even more with the Bolivarian revolution and the corruption and narco trade that goes with it.

https://www.reuters.com/article/us-barbados-debtrenegotiation/barbados-to-suspend-external-debt-payments-as-it-seeks-restructuring-idUSKCN1IZ031

Finally on Barbados. If the bonds are at 35, that implies a recovery of 50c or more, but a 50c haircut of 175% of debt/ GDP obnly reduces debt to 87.5% of GDP; that is still more than double the level Reinhart and Rogoff saw as the danger zone. 

 


 I think we need to see some 5-15c prints to shock some reality into the longs. For me PDVSA bonds or Puerto Rico GO bonds are the two prime candidates out of the bigger defaulters.

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