Tito's Blog

Random thoughts on entrepreneurship,
venture capital, private equity,
world finance and global economy

Archive

About

Get Updates

 Subscribe to RSS feed

Favorites
Slice of MIT, ZeroHedge, Baseline Scenario, Tito's News

Hello! You should follow me on twitter to keep in touch!

Jan
5th
Thu
permalink
 

Euro Government Bonds Monthly Redemption Calendar 2012

Now you can scare your friends at dinner hinting at the hundreds of billion euros of government debt coming due every month in Europe in 2012. Happy new year!

Source: Goldman Sachs via ZeroHedge.

Tags: government debt   euro   europe   finance   italy   germany   france   spain   greece   portugal   ireland  
14 notes   Comments (View)
Nov
10th
Thu
permalink
 
Tags: greece   italy   economics   government debt   euro  
26 notes   Comments (View)
Nov
3rd
Thu
permalink
 

Two Scary Thoughts On #itadefault

1. CDS and Implied Probability of Default

At 500bps, CDS on Italian public debt implies an annual probability of default of 6.8%. Compounded over 5 years, that would be a 30% chance of default in the next 5 years.

We all know what the track record of the market is in predicting large defaults (Lehman, Iceland, Dubai, MF Global, Greece).

2. Wealth tax

If the Italian government decided to suddenly appropriate from its citizens bank accounts (something that was done in 1992, and is now officially denied) for example an average €1000 per person, infants included, that would bring €60 billion.

That would be enough to cover 8-10 weeks of public debt refinancing, or to reduce debt/GDP ratio from 120% to 116%. You tell me if that’s enough to calm the markets.

Tags: italy   government debt   default   euro  
20 notes   Comments (View)
Sep
5th
Mon
permalink
 

Calling ECB’s Bluff

Nearly €70 billion of coupon and principal payments on Italian bonds are due in September 2011. I doubt that there is enough market appetite to meet this substantial supply at reasonable rates without the intervention of the ECB.

The Italian government doesn’t have the strength to craft a credible austerity cum structural reform package in the next few days (after not delivering it for 20 years). Confronted with market panic, the ECB will buy nevertheless.

First came excessive debt in the private sector. Then governments took over the private sector debt. Being the alternative so painful (disorderly default, banking system collapse, …), it is now the turn of the last balance sheet left (central banks).

Tags: ecb   italy   government debt   economics  
Comments (View)
Aug
24th
Wed
permalink
 

Game Theory On The Eurozone Crisis

I’ve been thinking about the European debt crisis in game theory terms. Let’s assume for simplicity that there are only two players: a European core country (solvent government and banking system, current account surplus) “Germanland” and a European periphery country (insolvent government and banking system, current account deficit) “Greetaly”.

I think that the strategy matrix of this 2-player game would be the following:

  Germanland “pulls the plug” Germanland “assumes the periphery debt” Germanland “doubles down”
Greetaly “presses the red button” Greetaly leaves Euro Greetaly leaves Euro Greetaly leaves Euro
Greetaly “enacts austerity” Greetaly leaves Euro Greetaly enters depression Greetaly may slowly recover

Greetaly will be able to stay in the Eurozone and avoid major economic shocks (i.e. banking system collapse or adoption of a new devalued national currency) only if Germanland is willing to assume its debt and if Greetaly accepts to give up its sovereignty by implementing a fiscal policy imposed by its northern neighbor.

Even then, I believe that in order to have a stable economic scenario, Germanland would need to “double down” and agree to fiscal transfers (or a “Marshall Plan”) benefiting Greetaly, otherwise the depression in the periphery would create social tensions and increase the likelihood of Greetaly eventually choosing to exit the Eurozone.

The only real choice left to Greetaly is to either accept foreign-imposed austerity or to “press the red button”, i.e. choose to default and/or leave the Eurozone now.

Below is a possible payoff matrix for Germanland and Greetaly. What makes it interesting is that short-term and long-term payoffs are different.

Germanland might have a hard time to politically justify another round of bailouts and even more so to launch a “Marshall plan” (with negative short-term effects), but that would be the best choice in the long-term. The bailouts today represent the necessary cost of a solid export-driven economy at nearly full employment.

Similarly, Greetaly would suffer significant shocks in the short term if it decided to default and exit the Eurozone, but on average as a country it would probably enjoy a faster recovery thanks to suddenly higher competitiveness, growing exports, lower debt overhang (as Argentina did).

  Germanland “pulls the plug” Germanland “assumes the periphery debt” Germanland “doubles down”
Greetaly “presses the red button” Germanland:
-20 ST, -10 LT
Greetaly:
-100 ST, +20 LT
Germanland:
-20 ST, -10 LT
Greetaly:
-100 ST, +20 LT
Germanland:
-20 ST, -10 LT
Greetaly:
-100 ST, +20 LT
Greetaly “enacts austerity” Germanland:
-20 ST, -10 LT
Greetaly:
-100 ST, +20 LT
Germanland:
-15 ST, +5 LT
Greetaly:
-20 ST, -20 LT
Germanland:
-30 ST, +10 LT
Greetaly:
-20 ST, +10 LT

Given that political decisions tend to optimize short-term outcomes and because of the high short-term cost of the Eurozone exit decision by Greetaly, the most likely outcome is the suboptimal box highlighted in yellow. Both Greetaly and Germanland are worse off in the long-term than in the optimal box highlighted in green.

There is a dominant strategy in the long-term, which would be a decision by Greetaly to exit the Eurozone, although at an extremely high short-term cost.

Tags: Government debt   euro   europe   eurozone   game theory   germany   greece   ireland   italy   pigs   piigs   portugal   spain   economics  
1 note   Comments (View)
Aug
21st
Sun
permalink
 

The Time Machine

Debt is the greatest time machine, it allows politicians to postpone problems and everybody else to anticipate consumption and investments. It is sustainable only as long as expected growth is on average in line with actual growth.

However, the time machine is apparently most powerful under high growth assumptions, creating incentives for everyone involved to be overly optimistic and to pass on the bill to the future or to someone else next in line at an ever higher cost.

Final diabolic feature of the time machine is compounding interest that tricks the human mind used to linear behaviors with exponential dynamics.

Tags: government debt   debt   economics  
Comments (View)
Aug
13th
Sat
permalink
 

How I Lost My Sovereignty

The European sovereign debt crisis seems to be developing along a path leading to accelerated political union of Eurozone nations. In part because it’s the relatively more benign option and in part because, at least initially, it offers the least-resistance, inertial option.

As a first step, key economic and fiscal policy decisions in debtor nations (Greece, Ireland, Portugal, Spain, Italy) are being made centrally by the European Central Bank and/or the European Commission under the direction of creditor nations (Germany, The Netherlands, Finland). In a surprisingly silent and passive loss of sovereignty, debtor nations are enacting substantial austerity measures as requested by their creditors.

In part, this development is positive because measures imposed on the European periphery also include important economic reforms that local politicians were too incompetent, shortsighted or corrupt to implement. Greece will finally improve its tax collection processes under the expert “technical guidance” of the troika. Italy will finally liberalize its labor/service markets and limit unfair economic rents extracted by heavily regulated guilds and professions. To paraphrase a famous quote by Winston Churchill quote, it appears that ClubMed governments will do the right thing, after having exhausted all possible alternatives.

On the other hand, such enormous fiscal tightening packages will represent a formidable drag to the periphery’s already modest growth. More austerity may reduce government spending, but will slow the economy and consequently tax receipts, possibly making the debt burden less manageable.

Creditor nations have driven monetary policy since the birth of the ECB, and are now driving fiscal policy as well. As Germany was struggling with a long recession, stagnating consumption and the difficulties of unification in the early noughties, Frankfurt-set monetary policy was too loose to contain inflation, real estate bubbles and loss of competitiveness in the European periphery. Economic policies in creditor nations pushed current account deficits onto debtor nations, bolstered exports and reduced unemployment at home. As the German export powerhouse is back above 2008 peak GDP levels with unemployment at a relatively healthy 7%, Frankfurt-set monetary policy is now tightening while Greece, Portugal, Spain and Italy have never grown back to their peak economy size, still have sluggish or non-existent growth and have high and increasing unemployment rates. To make things worse, Frankfurt-set fiscal policy will at the same time reduce government spending and tip the periphery back to recession.

With an 80% overall public debt over GDP ratio, the Eurozone as a whole would be in a better position than the US or Japan to manage its debt burden, if it completes its political integration at the expense of loss of sovereignty at the national level. Only if creditor nations agree on a framework of fiscal transfers to debtor nations and a full fiscal union through centrally-issued Eurobonds, can a depression in the European periphery be avoided. Although it is difficult to explain it to their local electorates, fiscal transfers would actually increase the likelihood of periphery public debt ever being paid back, though at the high political cost of higher unemployment in creditor nations (as the current account rebalances within Europe with higher inflation/lower exports/lower production in the core, and lower inflation/higher imports/higher production in the periphery).

The alternative to fiscal transfers is a depression in the European periphery, with (i) unbearably high unemployment leading to social tensions and (ii) higher risk of a self-fulfilling national banking system collapse due to rising bad debt, deposit withdrawal or financial panics. The combination of these two points increase the risk of the periphery “pulling an Argentina”, defaulting on its debt and abandoning the common currency, either because it eventually becomes the better alternative or because of national politics drifting to populistic or nationalistic excesses.

Tags: economics   eurozone   europe   euro   italy   greece   spain   germany   Government debt  
Comments (View)
Jul
30th
Sat
permalink
 
Estimates of when the US will run out of money (via Charting the American Debt Crisis - Interactive - NYTimes.com)

Estimates of when the US will run out of money (via Charting the American Debt Crisis - Interactive - NYTimes.com)

Tags: economics   US   government debt   default  
Comments (View)
Jul
21st
Thu
permalink
 

List of Bloomberg.com tickers for European government bonds

For some reason I can never find them on bloomberg.com itself. Here is a list I found today on CalculatedRisk, bottom of the article.

Greece2 Year5 Year10 Year
Portugal2 Year5 Year10 Year
Ireland2 Year5 Year10 Year
Spain2 Year5 Year10 Year
Italy2 Year5 Year10 Year
Belgium2 Year5 Year10 Year
France2 Year5 Year10 Year
Germany2 Year5 Year10 Year
Tags: government debt   bloomberg   europe   euro  
13 notes   Comments (View)
Jul
20th
Wed
permalink
 
Indeed, when bond markets liquidity dries up, gross supply is what matters.
Tags: bonds   government debt   italy   euro   eurozone  
10 notes   Comments (View)