Morgenson on Municipalities’ Swap Fiascoes

Gretchen Morgenson has a fair number of critics among readers of this blog, which I think is a tad unfortunate. Most of her articles are in fact sound; she is very reliable on executive comp, anything in the equity markets, or where she is working form legal documents, generally lawsuits. It’s when she wanders into debt markets that her attempts to present material to a mass audience sometimes include nails on chalkboard slips.

Financial Market Responses to Crisis in Europe: A Reassessment

At the start of EMU in 1999, economists had formed a set of expectations on how financial markets would behave inside the eurozone and on the euro’s implications for financial market volatility. Now that the banking crisis has turned into a deep economic recession (including elements of a sovereign debt crisis), it is time to assess whether these expectations have been met.

Jamaica: Start Jammin

After riding the global credit boom for the past decade, fate finally caught up with Jamaica. A prolonged process of deindustrialization and the shift to a services-based economic model led to a persistent series of current account and fiscal deficits that were financed by the debt markets. In two years, the country’s external debt to GDP ratio jumped to 105%, from 76% in 2008. At the same time, Jamaica’s central government debt, which includes all domestic obligations, reached 120% of GDP this year. Debt service was consuming 55% of the country’s fiscal revenues. The current account deficit is more than 10% of GDP, despite a sharp slowdown in economic activity. The Jamaican economy contracted 3.5% y/y in 2009. It was clear that the country’s economy was wrong footed and its debt load was unsustainable. This was the reason why Jamaican bond prices plunged during the end of last year. Still, there is a great deal of international support for the country. Jamaica is the third largest economy in the Caribbean, and closely aligned with the U.S. and Europe. Although the country was under a great deal of stress, the multilateral community was not going to allow it to collapse in disarray. Therefore, something was going to be done to get the country through a tough patch.

Redemption or Abstinence? Original Sin, Currency Mismatches and Counter-Cyclical Policies in the New Millennium

The emerging market crises of the 1990s focused the attention of economists on issues of debt composition and particularly currency denomination. Since in bad times the real value of the domestic currency tends to weaken, servicing foreign currency debt becomes more difficult exactly when the capacity to pay is diminished. This makes for riskier debt, less room for counter-cyclical fiscal policies and a monetary policy geared towards currency not output stability.

Bond Markets Soaking up Greece

Greece announced a 5-yr 8 billion euro deal today (as expected) – yesterday I called this a Hail Mary. Well, the Hail Mary worked! Books are closed, and the deal is well over subscribed (i.e., strong demand for the deal). Evidently, the talk is that there is natural demand for this product, via the rest of Europe, to shore up the value of the bonds over the near term.

Argentina’s Outlook: Political Issues Hurt a Favorable Economic Environment

From the economic point of view, 2010 should be a good year for Argentina’s economy. The agricultural sector will show a strong recovery, the industrial production is also growing, reflecting the performance of its neighbor, the Brazilian economy. Tax revenues will climb faster and debt services are lower than the last year. Nevertheless, we expect a year of continuous political conflicts that may generate uncertainty, some volatility in financial markets and may hurt the favorable economic environment. The conflict between the president of the Central Bank and the Federal Government is the first one but may not be the last one. 

China New Year, and One More Vote for GDP-Adjusted Bonds

I suppose it is traditional to dedicate the new-year piece to evaluating the “year that was”, or to make predictions for the coming year, but my only concession to this tradition will be to make the very (I think) obvious prediction that trade tensions are going to rise dramatically in 2010, and even more so in 2011 as interventions initiated in 2009 and 2010 come to fruition.  I am no expert on the subject of criminal law or the environment, and so have little to add beyond all that has already been said, but the huge amount of angry criticism China has received on the very visible subjects of the Copenhagen meeting and the execution of a British subject caught smuggling drugs will make it easier for tariffs and restrictions aimed at China to generate popular approval in Europe, North America and the developing world, especially since protectionists can easily add a “moral dimension” to their arguments.

Asset Price Co-Movements and the Dollar Carry Trade

The ongoing dollar carry trade has recently come to the forefront of the international policy debate (Roubini, 2009). Capital inflows to emerging market countries have put pressures on some currencies, and authorities have responded by slowing the pace of appreciation, in some cases by capital controls. This short article uses a GARCH framework to examine […]