Those weak sovereign credits

January 13, 2010

Is there any sovereign credit which looks remotely attractive these days? I feel like a bit of a heel talking about fiscal distress even as the attention of the world is rightly concentrated on much more pressing real distress in Haiti. But the drumbeat is getting hard to ignore.

Alex Dalmady has a good overview of Venezuelan debt, which has been soaring of late and which might yet continue to go up. If you’re a short-term momentum trader, it looks great. But buy-and-hold types have no business being in Venezuela:

Buying Venezuelan debt is like lending money to a wealthy, eccentric and partly insane uncle. You kind of figure he’s good for it, but there’s a good chance he’ll blow his fortune buying real estate on the moon or something and leave you hanging out to dry…

Corruption, deliberate misinformation and ineptness merge together to form an incomprehensible mess. There isn’t an official figure that can be trusted… the Central Bank puts FX reserves at $35 billion. Really?…

Alex concludes that while the opportunity cost of not being invested in Venezuelan debt is hight, a crunch of some description is “inevitable”. And therefore he just avoids the country altogether, which makes sense to me.

He should probably avoid Argentina too, while he’s at it. The debt situation there has never been messier: the president wants the central bank to transfer $6.6 billion into an account ring-fenced for paying private creditors. When the central bank governor refused, he was fired by the president, reinstated by an Argentine judge, and then seemingly confirmed in his decision by a US judge, who has frozen the central bank’s account in New York.

Right now the account only has $1.7 million in it, but as Goldman Sachs analyst Alberto Ramos says in a research note today, “the political and institutional implications of this preliminary court order could potentially be large and eventually lead the government to back off from insisting of getting the $6.6 billion from the central bank”. After all, if the $1.7 million is subject to attachment by holdout creditors, they’ll probably be able to go after any disbursements from the $6.6 billion fund as well.

The Argentine economy minister is still adamant that the country’s bond exchange is going ahead as scheduled, but there’s no way that’s actually going to happen if a puppet is in charge of the central bank or if there’s serious doubt about the ability of the government to get the contents of the $6.6 billion fund to bondholders without the money getting hijacked along the way. Certainly the bond market doesn’t think much of the Argentine credit these days.

Meanwhile, Greek debt is looking increasingly shaky, as Moody’s talks about the country suffering a “slow death” and Desmond Lachman says that Greek might as well leave the euro zone now, since it’s going to have to do so sooner or later in any case, and the longer it waits the more painful the process will be. Further east still, Barclays is reckoning that Nakheel debt in Dubai will ultimately recover less than half its face value. And of course other sovereign nations are having major problems too, from Iceland to the Pequot nation of Mashantucket.

This time last year, Paul Kedrosky and I wondered if 2009 was going to be the year of sovereign defaults. It wasn’t, and things look better now than they did back then: the number of countries with EMBI spreads of more than 1,000bp over Treasuries has gone from 14 to just one (Belize). That move, however, has happened without any real improvement in sovereign fundamentals. As a result, I fear that the main thing the rally has achieved is just to increase the downside of a sovereign-debt crisis, and minimize the upside should the world manage somehow to muddle through.

(HT: Otto)

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