Simplified and hypothetical default scenario

johnnyjb

Im clueless in the whole economy so this is only a shot in the dark.

If we defaulted on our loans or bonds or whatever is been talked about, wouldnt some parts of the market be happy to lend us money as we have no noose around our neck. We could "start from scratch"

In theory i would be more willing to lend to someone who had no massive debts.
I know its not as simle as this but is there any merit in it

Nody

Not really simply because the market expects you to default again (after all you've just done it...).

Argentina took years before they could get to the market and the amounts they can now borrow and the interest rates charged are not exactly favourable.

sarumite

johnnyjb wrote: »

Im clueless in the whole economy so this is only a shot in the dark.

If we defaulted on our loans or bonds or whatever is been talked about, wouldnt some parts of the market be happy to lend us money as we have no noose around our neck. We could "start from scratch"

In theory i would be more willing to lend to someone who had no massive debts.
I know its not as simle as this but is there any merit in it

But generally you would be looking to borrow from the same class of people who you defualted on.

Would you lend money to your mate if he hasn't paid you back for previous loans....probably not. The markets will see it as a riskier venture and charge a premium that would be too high.

Scofflaw

In theory i would be more willing to lend to someone who had no massive debts.
I know its not as simle as this but is there any merit in it

There's some merit in it, but look at it like this. There's a guy in town who borrowed massively, from you and others, and needs to borrow more. You're unwilling to lend more money to him because you know he's really deeply in debt, and you know there's nothing you can do to force him to pay you back. Although he's always managed to pay all his debts up to now, and always made a point of doing so, you reckon he might not be able to pay everyone back this time, although you know he'll try his hardest.

A week or so later he defaults on the money he owes, including to you, but he still wants to borrow more. Are you more or less willing than before?

cordially,
Scofflaw

ei.sdraob

Oh no you used the D word around here, thats not on now, none of that doom-mongering

Someone mentioned Argentina their troubles go much deeper than the default itself, this book is worth reading before mentioning them.

ilovesleep

sarumite wrote: »

Would you lend money to your mate if he hasn't paid you back for previous loans....probably not. The markets will see it as a riskier venture and charge a premium that would be too high.

Well, I lend my brothers money before, well into the 1000s now at this stage so that they had enough money for their adventures abroad. There were loans but I new in my heart and soul I was never going to see that money again but I was happy to lend it because I was helping them. Seriously. If only europe was like me

Laminations

Far too simplified but I agree that default is starting to look like the better option. Here's a more appropriate scenario. Instead of one guy in debt looking to borrow more this story involves more players. Let's call them Seanie, Hermann and Paddy. Hermann and his friends lend money to Paddy and Seanie, Paddy is a safe bet but Seanie is becoming more and more reckless with his borrowings, some would say he is gambling but Hermann doesn't mind because he is getting a great return on his loans. But then Seanie has a blow out night, loses it all on hookers and coke and realises his collateral is muck. Now Seanie looks after Paddys heart condition so Paddy is worried about Seanies predicament. Hermann is mad as hell and starts telling Paddy he should have controlled his friend - but Hermann lent to him knowing what he was like and with the great returns there was always risk. However, Paddy under a misguided sense of obligation tells Hermann he will try and pay back Seanies debts, he does this stupidly without realising how much Seanie actually owes. It emerges that Seanie has VERY large debts. Now Paddy can:

1. Honour his naive promise to sort Hermann out and cripple himself with debt (current approach)
2. Tell Hermann to massage his own prostate. (wouldn't end well)
3. Come to an arrangement with Hermann, and all lenders will understand that the debts were never Paddys and that Hermann should share a significant amount of the losses for gambling with Seanie. Paddys previous exemplar record for paying his actual debts continues to make him a good person to lend to. (This is what Stiglitz, Gurdiev, McWilliams, and a moxy load of other economists, and me, think is best)

Sir Oxman

Don't the 'markets' always look forward though?
Stupendous weight of debt lifted+reducing deficit = better bet

I hate those analogies of borrowing from a friend - they ain't our friends.

ei.sdraob

Laminations wrote: »

Here's a more appropriate scenario.

Welcome back

Scofflaw

gambiaman wrote: »

Don't the 'markets' always look forward though?
Stupendous weight of debt lifted+reducing deficit = better bet

I hate those analogies of borrowing from a friend - they ain't our friends.

Which is rather the point when it comes to markets. People do say "markets have short memories" and so on, but (a) 'short' on what scale, exactly; and (b) based on what evidence?

If someone can show me that defaulting on bank debt doesn't put you in a position where a couple of years later you're still unable to borrow on the markets, and your sovereign bonds are either at, or one rung above, junk status, then great - but otherwise, well, the problem is that there is a huge deficit and nowhere to borrow it from. And that "otherwise" is where all the current evidence points.

Also, perhaps it's worth pointing out that default in the sense used of Iceland and Argentina did not involve repudiating the debts - both countries remain(ed) committed to paying off their debts on a different schedule. Denmark, on the other hand, burned bank bondholders and depositors alike without any suggestion that it was a default - it was a normal wind-up process for a failed bank. Unfortunately, we didn't have any such wind-up procedure.

cordially,
Scofflaw

Tipp Man

Scofflaw wrote: »

Also, perhaps it's worth pointing out that default in the sense used of Iceland and Argentina did not involve repudiating the debts - both countries remain(ed) committed to paying off their debts on a different schedule. Denmark, on the other hand, burned bank bondholders and depositors alike without any suggestion that it was a default - it was a normal wind-up process for a failed bank. Unfortunately, we didn't have any such wind-up procedure.

cordially,
Scofflaw

your Denmark reference is interesting.

Do you (and everybody else on here) think this is a route we should go down?? If i remember correctly the bondholders and depositors lost equally in that bank failure

My opinion is that it is completely out of order but then again Denmark is a very socialist country

beeftotheheels

Tipp Man wrote: »

your Denmark reference is interesting.

Do you (and everybody else on here) think this is a route we should go down?? If i remember correctly the bondholders and depositors lost equally in that bank failure

My opinion is that it is completely out of order but then again Denmark is a very socialist country

Their government had not unilaterally decided to guarantee their banking debt which distinguishes them from us. Alas!

P. Breathnach

Tipp Man wrote: »

... Denmark is a very socialist country

Wha'?

Scofflaw

Tipp Man wrote: »

your Denmark reference is interesting.

Do you (and everybody else on here) think this is a route we should go down?? If i remember correctly the bondholders and depositors lost equally in that bank failure

My opinion is that it is completely out of order but then again Denmark is a very socialist country

Strong elements of "what they^^ said"! Again, the time to have said that Anglo would enter our bank resolution process - the time to have had a bank resolution process - is largely past. Then Anglo could have been a failed business put into quarantine by the state, now it's a bomb that requires cautious disassembly because it's intimately connected to the state.

I wouldn't call Denmark 'socialist', but however one views it, burning depositors and senior bondholders at the same rate is simply application of the legal norms for winding up a bank.

cordially,
Scofflaw

Tipp Man

beeftotheheels wrote: »

Their government had not unilaterally decided to guarantee their banking debt which distinguishes them from us. Alas!

Yes of course you are correct

P. Breathnach wrote: »

Wha'?

If Denmark isn't one of the best examples of a democratically socialist country then i don't know where is??

RichardAnd

ilovesleep wrote: »

Well, I lend my brothers money before, well into the 1000s now at this stage so that they had enough money for their adventures abroad. There were loans but I new in my heart and soul I was never going to see that money again but I was happy to lend it because I was helping them. Seriously. If only europe was like me

I've done just the same with my money but "long term" loans between brothers isn't really comparable to what the EU are doing with us.

20Cent

I don't buy this idea of markets having memory and they will "punish" us for burning some of the bondholders. Markets look at their computer screens and decide will I make money on this or not. If yes go for it if no don't. The Gov needs to carefully figure out which to burn (and by burn I mean either default, give a debt for equity swap or pay a portion of the debt) and go for it. Once cleared of some of this debt the markets will open up to us again. The current path is certainly not working, growth rates going down, the bond market is out of reach and the "austerity" measures are hitting the poorest hardest causing social strife. The markets are treating us as if we have defaulted anyway.

Shane Ross wrote recently about being in Geneva talking to traders who couldn't believe Ireland's guarantee. David McWilliams has said similar as have many other economists. Michael Lewis described an Anglo bondholder

Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the bank for 50 cents on the dollar—that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awakened to find his bonds worth 100 cents on the dollar. The Irish government had guaranteed them! He couldn’t believe his luck.

Read More http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103?printable=true#ixzz1JawTNJGN


We don't even know who these bondholders are except for the leak on Guido Fawkes website. These are huge investment houses. Presumably these places would have spread their bets and invested expecting some of them not to work out. They could also have insurance on the deals. Also they may have already sold them on to others at a discount but now Paddy is paying the full price!

Its widely acknowledged that some default is inevitable so best get it over with imho. We are looking at crisis after crisis for the foreseeable future the country needs some kind of stability and a plan to allow people to have confidence to invest and move on.

The way we are going the poorest will be hit the most and the gross unfairness of ordinary people paying the debts of private gamblers will create a downward spiral resulting in civil strife imho. Expect big gains for the ULA and Sinn Fein in the meantime.

beeftotheheels

20Cent wrote: »

I don't buy this idea of markets having memory and they will "punish" us for burning some of the bondholders. Markets look at their computer screens and decide will I make money on this or not. If yes go for it if no don't.

That's the point, in determining whether you will make a profit on a transaction you factor in the risks associated with that transaction. If there is a risk that a country will not repay its debts, then that risk gets factored into the price which an investor will be prepared to pay for a bond.

If we default because we cannot pay, our bonds will later command a risk premium until our economy and outlook have significantly improved, such that the market views us as a good debtor.

If we default and the markets believe that we could have paid, and chose not to pay, then a simple improvement in our economy will not be enough to convince them we are a good bet. They will continue to price in the risk that the next time it suits us not to pay, we will just decide not to pay. This could cause uncertainty for a longer time than a default based on an inability to pay.

Entirely in agreement with you on the Anglo bonds story, the guarantee was daft. But now it is done we cannot pretend that it can easily be undone, we have to deal with the realities of the situation we now find ourselves in.