Debt (Part 2)
A short primer on sovereign debt, Part 2 (read Part 1 here https://lnkd.in/eFh7rXFH):
Governments raise a ton of money from markets by issuing “sovereign bonds” (in jargon-speak — debt securities negotiable in exchanges issued by a national govt to borrow from non-residents). Irrespective of the issuing country, majority of these bonds are issued (i.e. their ‘contract jurisdiction’) either under the law of the State of New York, or the English Law (unsurprising, eh?)
Who are the investors? We don’t know for sure. The reason?
An estimated half of the global sovereign debt (bonds + loans) in emerging markets is held by commercial banks and private investors (~$54 trillion). Issuing sovereign bonds is complex. Usually, investment banks are hired to underwrite bonds. The top 10 underwriters (80% of all issuances) are banks in the US, UK, Switzerland, and the EU (Citi, Deutsche Bank, Goldman Sachs, JPMorgan Chase & Co.). By one estimate, ~75% of private debt holdings cannot be identified (obscured by contracts that funds and equity groups make with govts, which are not required to be disclosed). There have been calls for transparency on part of the underwriters to help identify sovereign bond holders.
From what is known, though, is that the top investors are mostly from six countries (US, UK, Switzerland, Germany, France, Netherlands). The big ones amongst them are BlackRock, PIMCO, AllianceBernstein, Fidelity Investments, and Amundi.
What are the interest rates? This is where the story gets interesting (and… frightening)
In case of bonds, one analysis with a limited number of countries found the coupon rates for developing countries averaging at 5.7%. Countries in Sub-Saharan Africa and many other poorest countries had an average coupon rate above the entire group, equivalent to 7%. In Caribbean Islands, Jamaica was paying 11.6% and Barbados was paying 12% in some cases.
Buying sovereign-debt stakes, especially in case of poor countries, is essentially an investor taking on the risk that these nations will default (and hence, there will be profits). A criticism is that it’s predatory behavior — if the risk gets too high, one can pass on the debt at a discount to more adventurous investors. When there is a debt crisis, countries usually knock the doors of the International Monetary Fund, which comes in with cheap money (combined with a policy and austerity commitments), and the guarantee that post-recovery private creditors will be paid off first, in full.
That, my friends, is the #debtcrisis story.
There are two interesting questions that I shall leave you with –
1. Bilateral credit (loans/grants between countries) has been traditionally cheaper, but increasingly overshadowed by expensive private capital. One of capitalism’s extolled virtues is the prosperity achieved through global trade. What are we missing when it comes to capitalism in the domain of public expenditures?
[As an aside, China using bilateral credit as a foreign policy tool seems to be less grounded in data. African countries’ debts with China are a third of what they owe to non-Chinese private lenders. China also did multiple rounds of debt forgiveness in Africa.]
2. There are a lot of debt-relief options talked about in the international discourse (postpone debt servicing, investors should take “a haircut”, more grants etc.) There is, however, a fundamental question about *capital* in the modern world. Mostly, it seems to flow largely from one specific set of rich countries to others, attached with terms and conditions (interest payments, IMF surcharges, policy commitments, etc.) It’s unclear how, if ever, the current rules of the world will be able to balance this out. Should this be characterized as a redistribution of wealth, or a variant of colonialism?
The World Bank
Daniel Munevar’s work in Eurodad — the European Network on Debt and Development
Abrahm Lustgarten’s reporting in The New York Times
Rachel Savage’s reporting in Reuters
Ana Monteiro and Tom Hancock’s reporting in Bloomberg News
Also a bit of inspiration from Devex and China-Africa Research Initiative at Johns Hopkins SAIS