Debt Sustainability: Which Countries Are Beyond the Point of Return and Why

Must Watch.




Who is Kyle Bass? Someone with a lot of credibility that puts his money where his mouth is and makes money.

Read Making a killing.

Among them was Kyle Bass, the manager of a hedge fund called Hayman Capital in Dallas. He was a Texan in his late 30s who had spent the first years of his career selling bonds for Wall Street firms. In late 2006 he'd taken half of the $10 million he had saved on Wall Street, raised a further $500 million, created his hedge fund and made a massive wager against the sub-prime mortgage bond market. By the time I went to see him, the sub-prime mortgage bond market had collapsed. He was now rich and, in investment circles, a little famous. But his mind had moved on - having taken his profits, he had a new all-consuming interest: governments. In his opinion, the financial crisis wasn't over. It was simply being smothered by the faith and credit of Western governments, which had taken on to their own books the risks associated with dodgy securities worth trillions.

Bass and his colleagues were no longer talking about the collapse of a few bonds but about the collapse of entire countries. They had a shiny new investment thesis. From 2002 there had been something like a false boom in much of the rich, developed world. What appeared to be economic growth was activity fuelled by people borrowing money they probably couldn't afford to repay. At a rough count, worldwide debts, public and private, had more than doubled since 2002, from $84 trillion to $195 trillion. "We've never had this kind of accumulation of debt in world history," Bass said.

I like people with CREDIBILITY, don't you?

When we met in late 2008, Bass had just bought his first credit default swaps on the countries he and his team of analysts viewed as the most likely to be unable to pay off their debts: Greece, Ireland, Italy, Switzerland, Portugal and Spain. A credit default swap enables investors to bet against the price of a bond - to "short" it. It is an insurance policy with a twist: the buyer doesn't need to own the insured asset. No insurance company can legally sell you fire protection on another person's house, but the financial markets can sell you default insurance on another person's investments.

The prices Bass paid for default insurance now look absurdly cheap. Greek government default insurance cost him 11 basis points, for instance. That is, to insure $1m of Greek government bonds against default, Hayman Capital paid a premium of $1100 a year. He guessed that when Greece defaulted, as it inevitably would, it would be forced to pay down its debt by roughly 70 per cent - which is to say that every $1100 bet would return $700,000.

A path Australia has taken:

It was simply being smothered by the faith and credit of Western governments, which had taken on to their own books the risks associated with dodgy securities worth trillions.

The Australian govt has taken on our banks private debt exposure and I reckon that puts them up for $500B+ when the property markets collapses.

Refinancing may push rates higher

THE nation's biggest banks are expected to draw heavily on covered bonds as they face the challenge of raising more than $80 billion in long-term funds from jittery credit markets next year.

Covered bonds, allowed by legislation passed last month, attract lower interest rates by giving investors a claim to savings deposits in the event of a default. ANZ Bank last week made the first Australian covered bond issue, and Westpac is said to be planning a raising. The Commonwealth Bank and NAB are expected to soon follow suit.

The numbers ticking up should scare you... Australian Debt Clock