Continued Sovereign Debt Buildup

I wrote a note a few days ago that summarized some key points from, “This Time is Different”, by Carmen Reinhart and Ken Rogoff.  As they write, global financial crises initiated by sovereign debt defaults are much more typical than most investors realize.  In many instances, the debt to GDP ratio of 0.9 is a metric that signals when many less than mature economies will risk defaults.


In the year-to-date, we have seen a massive issuance of global debt as many nations are attempting to plug holes in their budgets.  Below we’ve outlined from press releases some of the key recent issuances and their dates:


1/25 – Greece is reportedly trying to sell $32.5 billion of government bonds to the Chinese in a deal brokered by Goldman Sachs.  This deal would be more than 3x the size of the National Bank of Greece.


1/26 - Hungary on Tuesday sold $2 billion worth of 10-year debt, mainly to U.S. investors, in a move confirming its plans to come off International Monetary Fund aid this year.  Hungary sold the debt at a discount price of 99.86, bringing a yield of 6.269 or 265 basis points over comparable U.S. Treasuries, Deutsche Bank, one of the lead managers of the deal said.


1/26 -Vietnam raised $1 billion from its second global bond sale, offering higher yields than lower-rated Philippines and Indonesia, amid the busiest start to a year for global borrowing by developing nations since 2005.  The central bank set a 7 percent limit on the yield, the minimum amount investors AllianceBernstein L.P. and Western Asset Management estimated would be required to attract sufficient orders.


1/25- Greece raised 8 billion euros of a 5-year syndicated bond at a yield of 6.2%. The bond attracted total bids of EUR 25 billion, well above the EUR 3 billion to EUR 5 billion targeted by the government.


1/13- Indonesia scaled back an offering of dollar bonds to $2 billion from as much as $4 billion and scrapped a 30-year portion yesterday, people familiar with the deal said. Poland by contrast raised the most ever in a single sale of zloty bonds today, receiving 5.5 billion zloty ($2 billion) after 16.2 billion zloty of orders.


1/11 - Mexico sold $1 billion of bonds in the country’s first international offering since its credit rating was cut by Standard & Poor’s and Fitch Ratings. The bonds yield 5.25 percent, or about 1.42 percentage points more than U.S. Treasuries, the Finance Ministry said in a statement.


This acceleration of global debt issuances appears to be leading to a bubble in sovereign debt.  While we are not at bubble stage yet, we will be very focused on monitoring the issuance in the coming months.


Former Citigroup Chairman Walter Wriston once famously said, “Countries don’t go bust.”  In that case Mr. Wriston we have some Zimbabwean 30-years for you to buy . . .



Daryl Jones

Managing Director


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