OK! So I first thought there would only be 3 parts to this series. However, things keep getting worse on a daily basis. Who knows? There might even be a Part 5 and 6! Let's see how things develop.
In any case, California's deterioration continues. According to a very recent article in the L.A. Times, Bill Watkins, who heads the Center for Economic Research and Forecasting at Califonia Lutheran University, released a recent report. He urges that the State begin emergency discussions with both the Obama administration and the Federal Reserve in the increasingly likely event of a state default. Had he read "Marko's Take" he would have realized that these discussions are already taking place!
Watkins believes that the odds now FAVOR a default. California Treasurer Bill Lockyear sharply took exception with Mr. Watkins' assessment, accusing him of "irresponsible fear-mongering". It makes one wonder whether Mr. Lockyear has spoken to Governor Schwarzenegger who has been saying the same thing!
The crux of the problem is centered in the budget. Republicans are adamant in their refusal to increase taxes, while Democrats are equally determined in THEIR refusal of further budget cuts.
The only reason that California is NOT in default is that some banks still honor the IOUs already issued on 4 separate occasions. If they should refuse to honor those IOUs AND the Obama Administration refuses to provide emergency bailout funds, then the State will have no choice.
As I've mentioned previously in the "California Crisis Deepens" series, the State is SO important, not only to the United States, but the world. I believe the Obama admistration will have NO choice but to provide emergency bailout funds. Therefore, I disagree with Mr. Watkins' conclusions entirely.
California has come up with a rather interesting partial solution to the budget stalemate which will appear on the 2010 ballot: the legalization of growing marijuana! In so doing, the pot industry, the largest agricultural sector in the Golden State, will be subject to taxation at a variety of levels and should be able to raise revenues substantially. Recent polls show this initiative is very likely to pass.
I hope the new initiative has left this troubling piece on a "high" note!
So, why don't you give me your "Take" in the comments section below?
Marko's Take
Showing posts with label default. Show all posts
Showing posts with label default. Show all posts
Sunday, December 20, 2009
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
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
Sunday, November 29, 2009
California's Crisis Deepens... Part 2
When the words bankruptcy and default come up in the context of California's financial crisis, they have the tendency to unnecessarily scare the heck out of many people. As we pointed out in Part 1 last Monday, the situation IS dire, in fact, VERY dire, but let's discuss what all this rhetoric really means.
First of all, a default differs materially from a bankruptcy. A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement. Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due. In the case of California, the use of "IOUs" has precluded, for the time being, a default.
Therefore, a series of defaults must occur BEFORE a bankruptcy. So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.
There is precedent for individual states to be in default. According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843. One of which was Florida, which was, at that time, considered to be a territory,
Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.
According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY. The Constitution currently precludes enforcement of these debt through lawsuits. Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.
California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis. Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.
The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic. Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.
None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate. State defaults have precedent, while State bankruptcies DO NOT.
Finally, I do appreciate feedback and comments, pro or con. I will continue to provide regular updates on California as they become material. In the meantime, I will cover Gold, Silver and other timely and relevant topics.
Marko's Take
First of all, a default differs materially from a bankruptcy. A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement. Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due. In the case of California, the use of "IOUs" has precluded, for the time being, a default.
Therefore, a series of defaults must occur BEFORE a bankruptcy. So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.
There is precedent for individual states to be in default. According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843. One of which was Florida, which was, at that time, considered to be a territory,
Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.
According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY. The Constitution currently precludes enforcement of these debt through lawsuits. Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.
California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis. Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.
The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic. Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.
None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate. State defaults have precedent, while State bankruptcies DO NOT.
Finally, I do appreciate feedback and comments, pro or con. I will continue to provide regular updates on California as they become material. In the meantime, I will cover Gold, Silver and other timely and relevant topics.
Marko's Take
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