"Investing In Soverign Debt: Much Riskier Than You Think" – and US Debt is Too

Everyone is looking for a quick buck and higher return.   As this article points out, the debt that irresponsible nations, all of which followed the US off the gold standard (allegedly) and piled into the "borrow your way to economic success" action plan, are paying some pretty good returns these days.  Better than the almost as risky US debt market, that without help from China would be at high risk, in my opinion.    The US has the distinct short term advantage of being the world's existing reserve currency.   The US can turn it around if it can fix its political system which has gone the way of Rome.   The military industrial, oil, and health care and financial complexes dictate to the US government what they want and the US political system obliges them, not creating good policy or smart course corrections, but leading the US down a path of debt from which it will soon find itself at the so called "event horizon" or point of no return.     We need to cut our military expenditures in half, means test medicare and social security, and a lot of other unpopular things, including but not limited to a working single payer health care system in my opinion with optional private insurance for those who can afford it.    I took my wife to urgent care and spent 5 hours just to get her some muscle relaxers for her back spasms.   We paid $30 for the co-pay.    In Europe we could have called the doctor and they would have just wired the perscription to the pharmacy and we would have paid next to nothing for the medication as the government has huge negotiating leverage as the largest and single bidder in the nation.  

What is so bizzare is how the Western TASS financial News agencies change their story from day to day in regard to "risky" investments.  One day gold is a "safe haven" and the next day its part of the "risk trade" from which investors are moving away as the dollar "strengthens."  They get away with this on a day in and day out basis with seeming little resistenace.   In any case here is the link and excerpt from the article:

Investing In Soverign Debt: Much Riskier Than You Think

"…A couple of weeks ago, I covered the topic of default as it pertained to California, Marko's Take: California's Crisis Deepens… Part 2.  I did not, at that time, examine the history and likelihood of default of the debt of other countries.  The information is STUNNING.

The idea for this piece originally occured as the result of a report by David Faber on CNBC yesterday. What was most interesting about his report was how often soverign defaults occur.  For example, in data presented going all the way back to 1800, there have been 4 separate periods in which "the percentage of countries either in default or restructuring their debt" has risen to as high as 40%!

Despite the world's current economic woes, that figure stands at a "mere" 20% today. But, that number is rising, especially in light of problems reported regarding Dubai, which I believe are far more significant than they originally appeared.

Moody's, a very highly recognized credit rating agency, has published a study as to various statistics regarding sovereign defaults, which primarily covers the period from 1983-2006.  It also provides some limited information going back to 1949.  The study covers 103 countries from the 1949 starting date. The information revealed is STARTLING.

For example, in 1983 there were NO nations assigned a "junk" status.  But, by 2000, that number had reached 38%!  In 2006, the number remained high at 36%.

According to Moody's, one country has even defaulted TWICE.  Ukraine defaulted in both 1998 and 2000.

Historically, sovereign issuers, assigned a non-investment-grade rating, have a 25% likelihood of defaulting within 10 years of issuance.  As to corporate issuers, which ought to possess a MUCH higher probability of default, the corresponding  probabiltiy is barely higher at 32.6%.

Finally, once a country does default, the loss suffered by the holder is calculated by Moody's to be about HALF of the original value…."

Share on Facebook

Tweet This Post