China Financial Markets Thu 2010-07-22 10:17 EDT

Do sovereign debt ratios matter?

Michael Pettis

...No aspect of history seems to repeat itself quite as regularly as financial history. The written history of financial crises dates back at least as far back as the reign of Tiberius, when we have very good accounts of Rome's 33 AD real estate crisis...we have only begun the period of sovereign default. The major global adjustments haven't yet taken place and until they do, we won't have seen the full consequences of the global crisis...there is no threshold debt level that indicates a country is in trouble. Many things matter when evaluating a country's creditworthiness...there are at least five important factors in determining the likelihood that a country will be suspend or renegotiate certain types of debt...With inverted debt, the value of liabilities is positively correlated with the value of assets, so that the debt burden and servicing costs decline in good times (when asset prices and earnings rise) and rise in bad times...Inverted debt structures leave a country extremely vulnerable to debt crises...

China Financial Markets; sovereign debt ratios matter.

The Wall Street Examiner Sat 2010-05-22 19:56 EDT

Imagine There's No Credit Market: Another Look At German Controls

...Thus, when people speak of "rescuing the credit markets" they really mean to say rescuing the liquidity providers who failed to assess lending risks so profoundly they can't make required payments. When people talk of German restrictions killing the credit markets, they really mean killing the middle-men (which may or may not have a deleterious effect on government borrowing). German restrictions on certain types of equity and credit transactions are not aimed at reduced government borrowing. They are aimed at reducing the amount (and means of capture) of profit "earned" by middle-men in the transaction- profits, mind you, as per our model, in the case of government borrowing, come either as a result of the money's original owner getting less interest than a direct deal would generate, the government paying more interest (which only comes from higher tax revenues) than a direct deal would generate, or some combination thereof. ...liquidity providing actions of "credit market" middle-men has run amok. As per J.S. Mill, that credit markets are exerting a distinct and independent influence of their own means they are out of order. With increasing frequency, credit is mispriced or unwisely extended and liquidity, the raison d'être of these people, dries up when it is needed most. Yet the middle-men who fail in their tasks expect to be rescued from their failures, and given even more ways to profit from lending other people's money, while the pool of available savings shrinks. ...In one sense I'm quite happy about all of the financial sector bail-outs governments have provided these credit-market middle-men. Before the bail-outs, one had to argue that finance was like a tax on monetary exchange, now this point is clear, finance is, in fact, a tax- and a growing one at that.

credit markets; German-Controlled; imagine; looking; s; Wall Street Examiner.