Thursday, December 10, 2009

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.

So, if you're thinking about investing in sovereign debt, all I can say is "caveat emptor" or, buyer beware!

I hope you found this essay useful and informative. If you have any comments, pro or con. or have additional information of relevance, I'd love to become aware of it in the comments section immediately below this piece.

I will again be covering Gold tomorrow, given that the sharp correction has caused many people to declare the so-called bubble has burst.

Marko's Take


  1. Thanks for this article. I believe that sovereign debt is much riskier than many believe, depending on which nations you are discussing.

    I believe there is a case to be made that the US sovereign debt can not and will not be repaid at current US dollar value and that bond holders are actually in a very high risk situation, especially if the Fed ends quantitative easing, which I don't believe it can or will anytime soon.

    I commented on your article on my blog as well.

  2. Hey Duff:

    Thanks for the comment. I agree with you completely!




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