Felix Salmon

Cash: The Winners and Losers

Reuters Staff
Mar 23, 2009 22:06 UTC

Having too much cash is something of a luxury problem these days: the worst that can happen is that you find yourself subject to the occasional snarky column telling you to up your dividend. Meanwhile, the opportunities presented by having a large cash pile have never been greater. So I asked the friendly people at Gridstone Research to help me put together a list of the companies with the most cash. The very smart Sandeep Shroff came up with two spectacular spreadsheets: this one, which looks at net cash and cash flow from operations, and this one, giving the sector averages.

In case you’re not an Excel jockey, however, I’ve broken out the highlights. Here’s the top of the table, showing the companies with the most cash; it features most of the world’s triple-A companies. Apple, the one company everybody associates with the phrase "cash-rich", is indeed high up the list; what’s even more impressive is the amount by which its cash holdings increased over the past year — almost $7 billion.

Ticker Company Net Cash Year-on-year increase
F FordMotorCo. 41,801 1270
XOM ExxonMobilCorp. 35,553 3436
CSCO Cisco Systems Inc. 25,735 3469
MSFT Microsoft Corp. 23,662 251
AAPL Apple Computer Inc. 22,111 6725
GOOG Google Inc. 15,846 1627
PFE Pfizer, Inc. 14,411 (5239)
WYE Wyeth 13,632 496
PC Panasonic Corp. 11,773 443
INTC Intel Corp. 11,741 (3480)
SNE SonyCorp. 11,603 1415
TOT TotalS.A. 11,057 9049
CVX ChevronCorp. 10,151 3219
ORCL Oracle Corp. 10,042 4380
JNJ Johnson & Johnson 9,077 2225
ERIC Ericsson 8,815 791
AMGN Amgen Inc. 8,552 3401
BMY Bristol-Myers Squibb 8,111 7777

Meanwhile, here’s the bottom of the table:

CAT Caterpillar, Inc. (11,259) (1781)
T AT&T (12,327) (7437)
HMC HondaMotorCo.Ltd. (15,479) (5876)
DAI DaimlerChryslerAG (24,296) (13390)
NSANY NissanMotorCo.Ltd. (33,607) 3427
TM ToyotaMotorCorp. (39,268) (9474)
GE General Electric (104,062) 30031

This possibly helps explain why General Electric stock has done so badly of late, and also why GE is not like all those other triple-A companies. But it doesn’t shed much light on things like car companies: I don’t think the fact that Ford has lots of cash and rising necessarily makes it a more solid automaker than Toyota, which has a negative cash position and falling.

But those cash-rich companies certainly have a very broad and attractive opportunity set facing them right now. They can return their cash to shareholders, in the form of buybacks or dividends; they can buy back their own debt at a discount; they can try to acquire a competitor, make fill-in acquisitions, or expand into a new area of business; they can up spending on R&D; they can expand headcount; or they can just continue to do what they’ve done until now, which is happily sit back on their cash pile and simply wait for the perfect opportunity to arise.

The one thing I’m sure of is that none of these companies are in any hurry to spend their cash. I’m sure they all have a steady stream of underemployed M&A bankers showing them ideas every week; they’ve got to be used to saying no by now.

On the other hand, there are risks to holding cash — credit risks, counterparty risks, currency risks, and many other risks which a good CFO can try to minimize, but which never really go away. Maybe it really is better just to buy back your own debt, if you can do so at less than the price at which you issued it.

Reprinted from Portfolio.com

Bailout Math

Reuters Staff
Mar 23, 2009 15:37 UTC

Nemo at Self-Evident has a great post on what he’s calling the "Geithner Put", explaining how banks could buy assets with a long-term value of 50 cents on the dollar, pay 84 cents on the dollar for them, hold them to maturity, and still make a healthy 16% profit. Which does help explain why Geithner is convinced that the banks will want to sell their toxic assets under this plan.

Reprinted from Portfolio.com

Why Does WSJ.com Charge For Content?

Reuters Staff
Mar 23, 2009 14:56 UTC

Why do you need to pay money to read WSJ.com? The former managing editor of the site, Bill Grueskin, has a telling anecdote:

One day last month, a Columbia Journalism student asked me in class why WSJ.Com had started as a paid site. This moment reminded me of the scene in Annie Hall (about two minutes into this), where Woody Allen produces Marshall McLuhan to refute (OK, I get the irony) a pompous Columbia instructor pontificating about the media.
At the class, I turned to my co-instructor, Peter Kann, former CEO of Dow Jones and the person ultimately responsible for the paid strategy.
“I made the site paid because I was ignorant, ” Kann told the class. “I didn’t know any better. I just thought people should pay for content.”

This is a debate which won’t die. But it’s certainly the case that publishers in general have for years been fighting a rearguard action against the open-access remix culture that thrives online. Because some people will pay, and because other people are willing to pay, they conclude that all their readers must pay. And even when you don’t pay in cash, you must certainly pay in attention: if you want to read the publisher’s content, you must navigate to his website, and read it in exactly the way he wants you to read it, even if that means clicking through umpteen different pages, or sitting through flash ads, or otherwise being distracted and annoyed.

Now on the one hand it’s obvious why publishers behave like this online: they want to make as much money as possible, and the two biggest sources of online revenue are advertising dollars and subscription fees.

But on the other hand, this whole way of looking at the world is actually a major departure from how publishers have historically behaved. They’ve made their newspapers and magazines as easy to read as possible; they’ve charged as little money for them as they can, often distributing them at a loss, in order to maxmize readership; and in general they’ve bent over backwards to create a consumer-facing product which pleases, rather than annoys, the reader.

Elizabeth Jensen has an interesting article today about a different and quite promising new and alternative business model: one which plays to the strengths of the online world rather than fighting against its weaknesses (like the fact that it’s not well suited to display ads). GlobalPost.com makes substantially all of its content free, but then charges for a product which takes advantage of some very high-touch interactivity:

Called Passport, it offers access to GlobalPost correspondents, including exclusive reports on business topics of less interest to general audiences, conference calls and meetings with reporters, and breaking news e-mail messages from those journalists.
Passport subscribers, who pay as much as $199 a year, can suggest article ideas. “If you are a member, you have a voice at the editorial meeting,” although the site will decide which stories to pursue, said Charles Sennott, a GlobalPost founder and its executive editor. He said Passport is meant to “create a feeling of community” for subscribers who might otherwise see newsrooms as “impenetrable and fortresslike.”
GlobalPost correspondents, who include the former Washington Post writer Caryle Murphy in Saudi Arabia and a Time magazine correspondent turned novelist, Matt Beynon Rees, in Jerusalem, are paid extra for Passport work.

In order to maximize Passport revenues, both GlobalPost and its writers are going to want GlobalPost’s stories to reach as many people as possible: the website is no longer just a vehicle for selling advertising, but also a marketing vehicle for the broad dissemination of the content, which in turn bolsters the reputation of the journalists in the field.

So if I were GlobalPost, I’d publish lots of full RSS feeds for the entire website, and positively encourage any other websites to republish as much of the content as they like, with the restriction that credit must be prominently given to GlobalPost, along with links to both the GlobalPost home page and the original article. After all, the art of marketing is to go out and reach readers, not to sit back and wait for the readers to come to you. Essentially the articles become a free advertisement for the website, driving traffic there — at which point it can become monetized, and readers who like the website will stay, and possibly subscribe to Passport. You can’t ask more than that.

Setting your information free in this way violates much of the early history of internet publishing — but it’s very much of a piece with the history of publishing more generally. And I think it’s a much more hopeful business model than trying to jealously guard your content as much as possible. After all, on the internet, publishers don’t really compete with copies of their own content: they compete with all the other content online for readers’ attention. Trying to clamp down on copies is very often very silly: it only serves to reduce and annoy your readership. So maybe the solution is to encourage copies, instead.

Reprinted from Portfolio.com

Should there be Jail Time for Deceptive Cadence?

Reuters Staff
Mar 23, 2009 13:40 UTC

Jeremy Denk notes the crisis spreading:

In what is now a familiar story, Lee Ellen Jo Public, of Loma Vista Boca Loca, AZ, found herself at a piano recital, where the pianist had just concluded the exposition of the G major Schubert Sonata. Having invested some 7 minutes of very serious listening, she felt she could not abandon the equity she had built up, even though the prospect of paying off the rest of the development and recapitulation was daunting. Fellow audience member Ronald McGrumpy was much less sympathetic. "After the first two bars, I said to myself, are you kidding me, what kind of sucker do you think I am, I’m not going to stick around and wait for Schubert to develop that. If she got caught upside down on this deal, it’s her fault and her fault alone." Commenter Claude D., mainstay of the well-regarded financial blog Prelude to the Afternoon of a Fund, suggests many people are wondering whether to accept the damage to their listening credit and walk out. "Now, you see, Mozart’s solution to this problem, which is introducing a new theme in the development, carries its own risks; but Mozart seems to think you should look at the crisis as an opportunity and innovate your way out."

Someone (Tyler Cowen, of course) needs to teach Lee Ellen about sunk costs, sharpish.

Reprinted from Portfolio.com

JP Morgan Needs Two New Private Jets

Reuters Staff
Mar 23, 2009 13:19 UTC

Jamie Dimon has clearly decided he has no intention of ever becoming Treasury secretary:

Embattled bank JPMorgan Chase, the recipient of $25 billion in TARP funds, is going ahead with a $138 million plan to buy two new luxury corporate jets and build "the premiere corporate aircraft hangar on the eastern seaboard" to house them, ABC News has learned.

Apparently JP Morgan has promised to repay the $25 billion before it buys the two brand-new G-650s. So much for the importance of giving TARP funds to healthy banks. And what about the $30 billion in non-recourse loan guarantees that JP Morgan got from the Fed when it bought Bear Stearns?

This isn’t only about government money, though as Ryan Chittum notes:

Let’s not forget the shareholders, who bear the brunt of this kind of corporate spending with little say in it.

There’s simply no conceivable way in which these jets represent a necessary and legitimate business expense. They would have been an extremely lavish and barely-justifiable perk in good times; in bad times, they look like nothing so much as a calculated affront to JP Morgan’s customers. $138 million would fully fund $500 overdraft facilities for a quarter of a million Americans, with $13 million left over for waiving bank fees. Anecdotally, a very large number of WaMu customers are angry at suddenly banking with Chase. I’m quite sure that this news is not going to make them any happier.

Reprinted from Portfolio.com

Geithner’s Far-From-Magical Publicity Tour

Reuters Staff
Mar 23, 2009 12:14 UTC


Tim Geithner was interviewed by Erin Burnett on CNBC today. Here’s a snippet:

Sec. GEITHNER: The alternative approach is–which you have the government buying all this stuff, taking on all the risk under a balance sheet, which would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit on the balance sheets of banks who are at risk, creating a much longer, deeper recession.

BURNETT: And see, because some of the banks say to me they could do that. They could sit on the stock.

Sec. GEITHNER: They could.

BURNETT: They are making loans, but the real lending problem is in the nonbank system, which did account for half of the lending in the country. And they say, `We could sit on it. In fact, we’re not really sure we’re going to like the pricing here. And maybe we will sit on it.

Sec. GEITHNER: Well, you know, parts of our banking system are growing and expanding. We have plenty of capital. But there are other parts of the system that are going to need a bit more insurance, a bit more assistance to get through this and be able to lend. But, you know, what guides what we’re doing, again, is what’s what’s–we’re going to try to do what’s–all that is necessary…

BURNETT: Mm-hmm.

This neatly encapsulates everything that’s wrong with the Geithner plan — not least that Geithner just isn’t expressing himself clearly.

Geithner says that if the government bought all "this stuff" it "would be much more expensive to the taxpayer", despite the fact that there will be very little in the way of private funds. Then he segues straight into the Hempton plan of "letting it just sit there" on bank balance sheets, and declares that option would be dreadful and create "a much longer, deeper recession" — presumably because the banks, under that option, would be less prone to lending new money.

Yet immediately after saying that, Geithner says that the banks "have plenty of capital", before descending uncomfortably into content-free political talking points about doing "all that is necessary".

The only remotely reassuring part of this interview is the only bit that Geithner had no control over: the little picture in the bottom right-hand corner of what the Dow is doing today. It’s up sharply, which is something for which Geithner and Obama must be very grateful. If it had plunged again, in the same way it did the first time Geithner tried to reveal his bank bailout plan, the Treasury secretary’s incredibly hard job would have become all but impossible. Still, Dow 7,600 is still a very long way from the point at which it can be said that the stock market feels remotely good about the future. It’s just maybe not as apocalyptically pessimistic as it was a few hundred points ago.

Reprinted from Portfolio.com

Why it’s Too Early to Bring in Private Money

Reuters Staff
Mar 23, 2009 11:44 UTC

Alea has a semi-cryptic note:

This crisis being of a systemic nature, correlation is high, this means equity is risky because yields are lower than normal relative to more senior tranches and would sell off sharply if conditions were to normalize, a rational investor will bid assuming low or 0 correlation.
So there is likely to be a gap between the mtm value of the toxic assets and what a rational investor would pay, reducing or eliminating the incentive for banks to participate.

The key insight here is that bidders for the banks’ toxic assets don’t care particularly about the idiosyncratic risks of any given loan portfolio or CDO. Instead, they’re worried overwhelmingly about systemic risks associated with the ongoing financial crisis.

Essentially, we are not living in a world where investment prowess is repaid, and the fate of the private-sector participants in Geithner’s public-private partnerships is pretty much out of their hands. Either all of these assets are going to appreciate in value, or all of them are going to decline in value. And that’s largely a function of what happens to international financial markets and to the global economy as a whole. The potential buyers of these assets can do all the homework they like, trying to bid on slightly better assets rather than slightly worse ones, but the big risks — to both the downside and the upside — are systemic.

In other words, the private participants in the Treasury plan aren’t really adding value, they’re just gambling that things are more likely to get better than they are to get worse. For this we need to pay them much more of the profits than their share of the total investment?

Eventually, if things get better, then this kind of plan might make sense: correlations will come back down from 1, where they are presently, and private investors will be able to play a useful role in separating the wheat from the chaff when it comes to those legacy assets. For the time being, however, the days for such sifting remain far in the future. And it’s not at all clear why it pays to bring private investors in at this stage.

Reprinted from Portfolio.com

How Treasury’s Bank Bailout Could Make Things Worse

Reuters Staff
Mar 23, 2009 11:23 UTC

An anonymous commenter makes an excellent point this morning about banks’ willingness to participate in Treasury’s bailout scheme:

Isn’t the big hurdle getting the banks to offer up their assets to the auction process by FDIC? Once they do that, whether they accept the bid or not, it seems hard to imagine they would be able to value the assets very much above the highest bid offered. For example, if the assets are valued on their books at 50% of face value, they offer them in the auction process and the highest bid is 30%, I would think it would require a little chutzpah to decline the bid and go back to valuing these assets significantly above what has been shown as a market price.

To put it another way, far from making things better, the Geithner plan runs a serious risk of actually making them worse.

The status quo, absent any Treasury proposal, is basically the Hempton plan: let profitable-but-insolvent banks work their way slowly back to solvency by making large operating profits and not paying dividends. But the problem with the Hempton plan is that it only works on a kind of don’t-ask-don’t-tell basis: the banks can’t be publicly insolvent, since then they need to be taken over by the government.

The minute the Treasury plan is put into action, we’ll have a lot of public price discovery for the banks’ bad assets. And if the prices don’t clear — if the minimum price the banks will accept is higher than the maximum price that the public-private partnerships are willing to pay — then no one will any longer be able to perpetuate the fiction that America’s banks are solvent. And without that fiction, the Hempton plan — the muddle-through status quo — is toast.

The big hope of the Treasury plan is that the private sector will be willing to pay a higher price for leveraged assets than it would for unleveraged assets. The returns on private capital are being leveraged by five or six to one in this scheme, if not more, which means a high chance of them making lots of money, and also a high chance of the capital being wiped out entirely. During boom years, that was a wager that many investors were willing to take. But now? I’m not sure. Chalk it up as yet another thing-which-has-to-go-right in order for this scheme to work. There are far too many of those for comfort.

Reprinted from Portfolio.com

Ian Bremmer on Sovereign Defaults

Reuters Staff
Mar 23, 2009 11:00 UTC

Ian Bremmer and Preston Keat, of Eurasia Group, have a new book out — which means that in the process of plugging it, they’re happy to give detailed answers to bloggers on matters geopolitical. I decided to ask Ian about sovereign defaults; he gave a broad answer to begin with, but then I pushed him on specifics, and he came up with some very interesting analysis. Here’s the full exchange; you’ll have to scroll quite far down before Bremmer says that Ecuador’s default "was probably a rational decision", but there’s a fair amount of juicy stuff before that.

Felix Salmon: How many sovereigns are going to default in the coming year?

Ian Bremmer: The question has really two answers to it. First how many governments are really not going to be able to, economically-speaking, continue to honor their debt obligations. We are not macroeconomists, but certainly some states in Eastern Europe and Club Med states are going to face structural difficulties, especially if the economic conditions continue to worsen. However this is simply a matter of structural economicdifficulties and not of choice to default.

The second answer which is however often ignored, involves asking which countries will choose to default for political reasons? When economists assess sovereign credit defaults, they often overlook that states choose not to honor their debt obligations, in order to favor specific political players. Narrow political and economic interests often trump broad the broad public good, when it comes to default decisions. Economic analysis cannot capture these political choices, as economics assumes that most debt decisions are made with the broader public good in mind. But that is not always the case, we saw this with Russia in 1998, when the government chose to default in large part because that favored specific domestic industries and political interest groups. Ecuador in late 2008 reached a similar decision – there, a populist President repudiated part of the national debt for lagely because the decision plays well with populist left-wing elements of the electorate in advance of the April 2009 election.

In the next year, we do not foresee any states that defaulting for political reasons at this point. But it will be important to monitor two issues: countries that have populist or nationalist leaderships and second, whether multilateral organizations will be politically able/willing to bail out smaller states that are significantly impacted by the crisis.

States with authoritarian and populist government, such as Algeria, Lybia, Russia and Venezuela, have a natural propensity to default, as their elites and governments often politically benefit from such actions. However, the first three don’t really have high levels of debt. Russia of course has significant corporate debt where there could be significant defaults, especially if the Kremlin decides to stop bailing out oligarchs. Venezuela could be in the middle of a full-fledged fiscal and balance of payments crisis by the middle of 2010 if oil prices remain depressed and they maintain their current policy mix. Venezuela’s risk spreads, which have climbed to 1800bps in the last few months, reflect market concerns over their ability to pay. However, bear in mind that Chavez has stayed current on Venezuela’s sovereign external debt obligations even at the worst of times (2002/2003 PDVSA strike). History is no predictor of the future, but PDVSA has substantial overseas refining assets that could potentially be at risk of attachment in the case of default, which should temper the government’s propensity to default.

This raises an important question, namely which other states could get populist leaderships that will have incentives to default? This is something that we’ll be watching very carefully as the social effects of the economic crisis are increasingly felt around the world. Current governments could either be voted out of office or forced to resign because of the crisis, as it has already happened in Iceland and Latvia. It will be key to watch who are the replacement governments? Will these come to office on a wave of anger directed at foreign interests? Will governments see defaults as politically profitable? Much of this will be a matter of timing, and again it is too early to tell…governments often make the decisions to default or continue to pay at the last minute, these things are not always planned in advance. So we will continue to monitor that.

The second political risk here is the inability of multilateral organizations to get their act together. The IMF will likely need more funding, especially if the crisis worsens, and more states need aid. With the G20-level negotiations facing a high likelihood of deadlock, what are the chances that more money will be pumped into the IMF? Capital-rich states such as China, the GCC states or Japan will inevitably ask for an increased voice within the IMF, but readjusting voting rights within the organization will be subject to lengthy negotiations. Similarly, while the EU provides support to countries within the EU, the question of capacity is critical. The EU is obviously less likely to support non-EU states, especially if the crisis worsens. So monitoring the capacity of multilaterals for concerted actions is essential. While we expect that in emergency cases, these organizations will function, their capacity, especially under worse economic conditions, cannot be taken for granted.

With this in mind, the set of countries to watch are the smaller states in regions that are historically default-prone or have been hard hit by the crisis, such as in Central America or Eastern Europe. These states are generally extremely dependent on global markets and securing international financing, especially from the multilateral institutions, so they are reluctant to default. These are the states that in a worst case scenario (such as is the case currently with Hungary or Ukraine or Romania), they will turn to the IMF/WB/IDB or the EU before defaulting to private creditors.

FS: Ian, you start off by drawing the distinction, which is very common in the world of sovereign credit analysis, between ability to pay and willingness to pay. On the subject of ability to pay, you start off by mentioning "Eastern Europe and Club Med states": are those the credits which you think are most likely to face the kind of real fiscal crunch which makes debt repayments essentially impossible? Can you be a bit more specific about which countries you have in mind? Would they include Greece? Italy?

IB: There are still multiple variables affecting default risk that are not yet known. In addition, we expect ad hoc support would be provided from other eurozone members to avert default, though this depends on the extent of the needs. Clearly Greece and Italy are causes for concern as are a number of Eastern European countries outside the Euro zone, such as the Baltic states, especially Latvia, Hungary, Romania and Bulgaria. There is however still a high degree of "solidarity" among EU states even as each concentrates primarily on its domestic economic problems. There is a very high treshhold of tolerance to do what is necessary to keep the overall EU project on track. This includes, within reason, providing whatever budgetary support an EU member state might need in the short time to ride out the worst aspects of the financial crisis.

FS: You then, rightly, spend quite a lot of time on the states which might default simply through a lack of willingness to pay — as Ecuador has already done. You say that this factor is "often ignored" — do you mean by the IMF? By sovereign credit analysts? By the market? How do you think that the world and the markets might change if the people ignoring willingness-to-pay issues stopped ignoring them?

IB: The problem is that it is more difficult for everyone to price in willingness to pay than ability to pay. When markets do not have adequate information to price things, often they don’t. Capability to pay can be measured in multiple ways (capital and investment inflows, cash in hand and foreign exchange reserves, budget deficit levels, export values etc) whereas willingness is a more subjective issue and can turn on a political whim. If the IMF has a decent relationship with a country’s political and economic leadership, they should be able to spot willingness problems earlier than markets. But markets can indicate an unease about a country’s willingness to pay, for example by allowing spreads to widen: this usually indicates grave doubts that a country can or wants to service its debts in the long term.

FS: You say that "Venezuela could be in the middle of a full-fledged fiscal and balance of payments crisis by the middle of 2010 if oil prices remain depressed and they maintain their current policy mix." Given that the current policy mix is very much a consequence of high oil prices, how likely do you think it is that Chavez will continue his current rates of spending even in the face of severely reduced revenues? And when making those decisions, how cognisant will he be of the fact that PDVSA’s overseas assets risk being attached if the sovereign defaults? Do you think that Venezuela has a significantly higher degree of economic and legal sophistication than Ecuador, which seemingly defaulted without really going through the consequences of that decision?

IB: In Venezuela there will be some fiscal adjustment, as well as the ongoing currency devaluation, but nothing major that will generate significant political pain for the rest of 2009. In other words, Chavez’s government will continue to muddle along as long as it can during 2009, dipping into its oil funds to finance current expenditure rates. The likelihood of a significant fiscal adjustment is low. But things do get much more serious if the oil price remains this low through 2010. There are other strains meantime though: PdVSA has billions of dollars of unpaid receipts from oil service companies on its hands.

It’s not at all clear that Ecuador paid a high and immediate cost for defaulting. That might embolden others. In Venezuela there has been an issue over whether assets could be sequestered due to the policies of nationalization, but the legal case remains unclear. In the meantime PdVSA is divesting itself of some assets abroad (including gas stations in the US) to limit their liabilities. Not sure there is a high likelihood is of PdVSA’s assest being sequestered. But clearly, this would be a last recourse.

FS: Can you be a bit more specific about the Central American and Eastern European countries which are "extremely dependent on global markets and securing international financing, especially from the multilateral institutions"? In Eastern Europe are you saying that absent multilateral intervention, Hungary, Ukraine, and Romania would already have defaulted on their private-sector debts? And which Central American countries did you have in mind?

IB: In EU eastern Europe, there are mechanisms available to avert sovereign default, and this makes it very unlikely. But there are fewer tools to avert private debt defaults, and the severe credit and liquidity constraints in the region make refinancing more difficult. So we can see significant defaults, even if not at the sovereign level. Ukraine is riskier, as it is not eligible for the EU facilities that provide support to EU members. Likewise, western Balkans countries have no formal recourse to the EU, though they can benefit from IFI support, and potentially bi-lateral EU support. So they are riskier than EU members, but not as risky as Ukraine. In addition, the key Balkan governments — Serbia and Croatia — are averse to default, and display more effective macroeconomic policy management than does Ukraine.

Countries such as El Salvador, Costa Rica, Panama, and Jamaica have already turned to the WB and the IDB and contracted loans to pay off soverign debt or to contract contingency funds in the event that support is needed for their domestic banks and financial institutions.

FS: What do you foresee happening on the external-debt front with the largest sovereign defaulter of all time, Argentina? Will it default again? Will it attempt some kind of swap with the holders of its defaulted debt?

IB: Argentina faces a tough financing picture in 2009, 2010 and 2011, which could become even more complicated as revenues fall (due to an economic slowdown and falling export prices) . Exports are likely to fall even quicker if Argentina remains isolated from international capital markets. The government, however, has been trying to dispel doubts about its willingness and capacity to pay, and last year nationalized the local pension funds so as to have enough cash to meet its (more than $18 billion) debt obligations. The government probably has enough to make it through this year, but 2010 will be challenging.

Still, a default will probably be politically costly, as it will bring back memories of the 2001 crisis. As a result, the government will probably try to avoid one, and even some sort of agreement with the IMF is more likely than a default at this point. In spite of its heterodox orientation, Kirchner has made a point of honoring all its debt obligations.

FS: Finally, with dozens of sovereigns trading at distressed levels, the debate over "vulture funds" is heating up again. Do you think that the current crisis has changed the balance of power between sovereigns, multilaterals, and private-sector creditors? Is there a chance that the IMF might attempt to resuscitate the kind of sovereign bankruptcy proceedings (SDRM) which failed to get traction a few years ago? Given that the funding window is now closed for these countries, would it be fair to say that the opportunity cost of default — and the cost of default more generally — has never been lower? How much damage has Ecuador, say, really done to itself by defaulting on its global bonds? And what are the chances of the IMF revisiting its lending-into-arrears policy in the event that a few more countries default?

IB: This is outside the pool we usually swim in but let me take a macro-level stab at unpacking the issue. The real issue is how quickly international institutions will be reoriented toward keeping as many countries as possible in the system. The repricing of risk brought on by the bursting of the global credit bubble has doubtless limited the availability of credit to more distressed sovereigns and, in turn, their ability to turn to private markets for money. But the G20 will take up the effort to make emergency financing more available through the IMF, though the way that institution is managed going forward remains very unclear. My sense is they will have larger fish to fry – i.e. they will focus assets and rescources on being able to bail out more mature markets. The IMF may come out of next month’s G20 a more important and better capitalized institution. That strengthening of the multilateral institution doesn’t imply weakening sovereigns and may in fact produce more efficient outcomes as the availability of such funding creates opportunites for sovereign borrowers and eventually, one hopes, even with private-sector creditors.

For these reasons, it is hard to say whether Ecuador’s default represents a harbinger. It clearly made the calculus that with access to markets dried up, the up-sides of defaulting now were larger than the costs. And it was probably a rational decsion. The problem is that the costs will be felt more in the medium term, placing stresses on dollarization etc. In other words, the government opted for some short term econmic gain but generated conditions for larger dislocation down the road.

Reprinted from Portfolio.com