Entering the age of default
James Saft today quotes the “six ways to dig oneself out of a debt hole” of Jeffrey Gundlach. Boiled down, they are
- Lower interest rates
- A money transfer from an outside benefactor
- Higher revenues (taxes) and/or lower spending
- Printing money
He’s too polite to mention the seventh option, which is to lie about how much debt you have and hope the markets don’t notice.
It’s worth bearing this list in mind in light of what David Merkel has to say about sub-sovereign debt:
I have long said that the health of the states is a more valid measure of the health of the nation than looking at national statistics. Why?
- The states can’t print money, or force ask allow the central bank to buy their debt.
- In general, the states must run balanced budgets. (Would that we constrained the Federal government to do the same through amending the Constitution. Somebody bring that up after the crisis is over, please?)
- State statistics are more reliable than Federal statistics, because they serve fewer political goals.
John Dizard seems to be thinking along similar lines, saying that Greece has already started restructuring its debt, on the grounds that the state hospital system is imposing haircuts on its creditors.
It’s only natural to look at sub-national defaults and near-defaults, from entities like Greek hospitals or the state of Illinois, as indicative of a broader fiscal malaise. If nothing else, it’s a sign that the sovereign is either unwilling or unable — or both — to bail out the troubled borrower in question. And as Merkel says, sub-sovereign defaults are “purer” than their sovereign counterparts, since a lot of the tricks available to the sovereign are inaccessible to anybody else.
I don’t think it’s fair to say that problems with Greek hospital debt mean that the sovereign has already defaulted, any more than non-payment from Illinois means that we’re in the middle of a US default. But I do think that default will become more common among sub-sovereign debtors, and as it does so, both creditors and debtors will start considering it seriously among the menu of options available. When nobody’s doing it, default is unthinkable. But once it starts popping up all over the place, it becomes a strategic option. That’s true of homeowners, who are more likely to default when their neighbors are doing it too, and it’s true of sovereigns as well.