Harvard’s Rogoff Sees ‘Bunch’ of Sovereign Defaults (Update2)

By Aki Ito
Feb. 23 (Bloomberg) -- Ballooning public debt is likely to force several countries to default and the U.S. to slash spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big U.S. banks.
Following banking crises, "we usually see a bunch of sovereign defaults, say in a few years. I predict we will again," Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo today.
He said financial markets will eventually drive bond yields higher, and European countries such as Greece and Portugal will "have a lot of troubles." Global scrutiny of sovereign debt has risen as nations including Greece reveal fiscal deficits that have swollen in the wake of the worst global financial crisis since the Great Depression.
"It’s very, very hard to call the timing, but it will happen," Rogoff, co-author of a history on financial calamities, said in the speech. "In rich countries -- Germany, the United States and maybe Japan -- we are going to see slow growth. They will tighten their belts when the problem hits with interest rates. They will deal with it."
Concern about Greece’s ability to fund its debt have roiled financial markets since the government said it had a budget shortfall of 12.7 percent last year, the highest ratio in the 27-member European Union.

More Than Russia

Greece’s debt totaled 298.5 billion euros ($407 billion) at the end of 2009, according to the Finance Ministry. That’s more than five times more than Russia owed when it defaulted in
1998 and Argentina when it missed payments in 2001.
The cost of protecting Greek sovereign debt from default surged in January, then declined this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That’s up from 171 at the start of December.
"Greece just highlights that one of those risks is sovereign default," said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. Still, "it doesn’t justify the situation where we’re all in a panic and are going back to cash in the post-Lehman shock," she said, referring to the global credit freeze following the September 2008 collapse of Lehman Brothers Holdings Inc.
In an August 2008 interview, Rogoff said "the worst is yet to come in the U.S." and predicted the collapse of "major" investment banks.

‘Out of Control’

Meanwhile Japan has the largest debt of all, with the Finance Ministry stimating borrowings of 973 trillion yen ($10.7 trillion) by March 2011, more than the economic output of the U.K., France and Italy combined.
Japanese fiscal policy is "out of control," said Rogoff, 56, who is a member of the Group of Thirty, a panel of central bankers, finance officials and academics headed by former Federal Reserve chairman Paul Volcker.
Standard & Poor’s last month warned that it may downgrade Japan’s AA credit rating unless the government comes up with a plan to reduce the debt burden. Bank of Japan Governor Masaaki Shirakawa last week urged the government to show how it plans to repair its finances, and Finance Minister Naoto Kan aims to release a fiscal strategy by June.
Fink said Japan’s debt is sustainable because more than 90 percent of the country’s bonds are held by domestic investors, reducing the risk of capital flight. "For Japanese investors, JGBs are risk-free assets no matter what S&P ranks them,"
she said.
Rogoff’s 2009 book "This Time Is Different," co-written with Carmen M. Reinhart, charts the history of financial crises in 66 countries.

I wish there was an ETF that tracked Credit Default Swaps.

Batman wrote:

I wish there was an ETF that tracked Credit Default Swaps.

The CDS replicate more or less the behaviour of the bonds issued by their underlyings in a "synthetic" way. CDS could be considered as a kind of fixed term unfunded bond.
For instance, the 5Y CDS on Greece will insure the buyer of protection against the default of Greece, defined notably by its default on its government bonds.

Of course there's a basis between the CDS and the bonds but taking an exposure on the bonds (long or short) is a good way to have a pay off similar you'd get with a CDS

Sauros wrote:

Batman wrote:

I wish there was an ETF that tracked Credit Default Swaps.

The CDS replicate more or less the behaviour of the bonds issued by their underlyings in a "synthetic" way. CDS could be considered as a kind of fixed term unfunded bond.
For instance, the 5Y CDS on Greece will insure the buyer of protection against the default of Greece, defined notably by its default on its government bonds.

Of course there's a basis between the CDS and the bonds but taking an exposure on the bonds (long or short) is a good way to have a pay off similar you'd get with a CDS

Thanks for the tip. I have been studying up on bonds lately and I think they could be a key part to our fund in the future. Do you know of any good literature on CDS?

Batman wrote:

Sauros wrote:

Batman wrote:

I wish there was an ETF that tracked Credit Default Swaps.

The CDS replicate more or less the behaviour of the bonds issued by their underlyings in a "synthetic" way. CDS could be considered as a kind of fixed term unfunded bond.
For instance, the 5Y CDS on Greece will insure the buyer of protection against the default of Greece, defined notably by its default on its government bonds.

Of course there's a basis between the CDS and the bonds but taking an exposure on the bonds (long or short) is a good way to have a pay off similar you'd get with a CDS

Thanks for the tip. I have been studying up on bonds lately and I think they could be a key part to our fund in the future. Do you know of any good literature on CDS?

I guess the Hull has a decent chapter on Credit Derivatives now http://astore.amazon.co.uk/theloroftra-21/detail/0136015891 but while it's the Bible of the young investment banker who delta hedges options, i think the book is not worth its price for a speculator as you or me.
I guess you can find on the web good primers too, notably at first sight the one on wikipedia seems decent : http://en.wikipedia.org/wiki/Credit_default_swap

Finally, the best source on CDS: Sauros Any question do not hesitate