March 1, 2010

Sovereign default time capsule: what people were saying in real time as debt and currency crises played out
From the unthinkable, to the possible, the unavoidable, the actual and finally, the patently obvious
Argentina
3/8
Sovereign debt price: 11 2017 For many years, Argentina was the darling of global
120 bond investors, with the largest weight (25%) in the
110 “The pressure has come off Argentina” – Bear Emerging Markets Bond Index, and very tight credit
Stearns Senior International Economist [01/01] spreads. The country had a surplus of Chicago-trained
100
“Argentina may save $13 bn government economists, and many supporters of its
90 over 5 years in bond swap” orthodox currency convertibility program (1 peso=$1):
80 – Bloomberg [05/01] “There’s no sense in attacking the Peso, as the Central
70 “Argentina bonds gained Bank has the reserves to back every bill in circulation
Banks, the IMF, IADB and Spain on increased optimism the and is in a position to satisfy all the demand for foreign
60 promise $40 bn in aid. “This should IMF will approve additional
improve the investment climate, and currency” – Templeton Asset Management, in August
50 financing to help avoid 1998. Argentine politicians said they would “dollarize”
together with enhanced domestic and
default”
external confidence, lay the ground before surrendering to a devaluation, a plan supported by
40 - Bloomberg [08/01]
for sustained economic Argentine the Dallas Federal Reserve.
30 growth” – IMF Managing Director
[12/00] Deflation was too painful to sustain, and Argentina did
20
not deliver low fiscal deficits that convertibility required.
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 The aftermath: convertibility collapsed, the Argentine
Source: Bloomberg.
peso fell by 75%, and Argentina defaulted on its bonds,
its 5th default since the creation of Argentina in the 1820s.

Mexico
Peso/USD
2 “The danger of a breakdown of the Peso is pretty much gone. There is
Mexico had convinced investors in the survivability of its
not much to worry about, this thing is rock solid” Head of EM Research,
Bear Stearns & Co [8/93] “crawling peg” exchange rate regime, established in
Creation of $20 bn Exchange 1989. Investors responded with a whopping $50
3
Stabilization Fund [2/95]
billion in short term investments in government bonds
“There’s no other country in the
4 Treasury Secretary Robert (Cetes, Tesebonos, Ajustabonos, Bondes, etc).
world where I can buy Gov’t
Rubin, to Senate Foreign Offshore investors actually tripled their holdings in 1992,
securities that yield so much and
Relations Committee: “low just as the pressure started building. The quotes shown
5 are safe”…“I’m as convinced as I
probability event that few are indicative of consensus views investors had in
can be that the risk of an overnight
could have anticipated” [4/95]
major devaluation is extremely Mexico’s economy and currency.
6 small.” – Fidelity Portfolio
Manager, [4/93] But Mexico could not generate the competitiveness,
7 export growth and low inflation to back up a currency
Creation of permanent $6.7 bn
linked to the dollar. The Peso collapsed by more than
line of credit for Mexico from the
United States and Canada [4/94] 50% after it broke, despite the presence of large credit
8
lines created both before the peg was abandoned, and
Apr-93 Sep-93 Mar-94 Sep-94 Mar-95 Sep-95 Mar-96 shortly thereafter.
Source: Bloomberg.

Russia Russia engendered a peculiar brand of Stockholm’s

Sovereign debt price: GKO 3/10/1999 syndrome. Its most ardent supporters were virulent about
its infallibility, despite Russia’s limited history of
100 “Russia doesn’t need a bailout; an IMF loan is just to restore market industrial capitalism (compared to Eastern Europe).
confidence.” “There’s no comparison to Mexico, which had
fundamental reasons to have a cheaper currency. It had a balance of Foreign capital flooded into Russian domestic debt
90 payments problem and current account problem. Russia doesn’t” ($30 bn, an example of which is shown in the GKO
– ANZ Research [06/98] Russia stocks and bonds soared after chart), restructured Soviet era debt (another $30 bn),
80 the promise of $22.6 bn in loans led and its Eurobonds.
by the IMF – Bloomberg [07/98]
Russia collapsed for similar reasons the others did: fixed
70 exchange rates, deteriorating terms of trade, insufficient
return on foreign capital, etc. The Ruble fell by 75%
60 “This takes the pressure off, and Russia can now once the currency peg broke.
trade on its own fundamentals” – Hermitage Russia
Most bizarre moment of 1998: when the former head of
50 Fund [07/98] “Russia looks extremely appealing, as
the announcement represents a massive boost of the IMF Capital Markets Group, then a strategist at
confidence” – Troika Dialog Fund [07/98] Deutsche Bank, said on a conference call that he was so
40
confident in Russia that he would put his own daughter’s
Mar-98 Apr-98 May-98 Jun-98 Jul-98 education money in the GKO market.
Source: Bloomberg, International Monetary Fund.
 March 1, 2010
Sovereign default time capsule: what people were saying in real time as debt and currency crises played out
From the unthinkable, to the possible, the unavoidable, the actual and finally, the patently obvious
Dubai (Nakheel)
2/4
Nakheel Develop 2 Ltd debt price: 2 01/11
Money poured into Dubai, financing a construction boom
100 “Dubai World and its advisors are of incredible proportions. As shown in a prior EoTM,
close to a deal to ease the Dubai construction was not only larger than China’s
90 “Demand for property will
conglomerate’s $20 bn debt
continue to outstrip supply until Shanghai/Pudong boom on a per capita basis, but on an
burden” – Bloomberg
80 2010, sustaining growth until the
[10/09] absolute basis as well. Many investors believed that Abu
end of the decade”. Demand Dhabi would bail everything out in the end, to avoid
70 sustained by population growth
and rising living space per person disruption to the broader region. Moral hazard arguments
60 Middle East Economic Digest like this don’t always work; they certainly don’t appear to
[06/07] be working for holders of Nakheel bonds.
50
This is in essence a sovereign event, rather than a
40 “Nakheel bonds posted their largest gain since February after
Sheikh Mohammed bin Rashid, the Ruler of Dubai and Vice
corporate one. Dubai World, which owns Nakheel,
30 President of the UAE, said he was not worried about the emirate’s represents more than 2/3 of Dubai’s $80 bn in external
debt burden. Nakheel could draw on funds from a $20bn bond debt.
program that Dubai launched in February” – Bloomberg [09/09]
20
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09
Source: Bloomberg.

Indonesia
3/4 Paul Krugman started a debate about Asian growth
Sovereign debt price: 7 2006 in 1993 with “The Myth of Asia’s Miracle”. His
120 “Although the entire East Asian experience gives ground for optimism conclusions on productivity differentials are still hotly
over the prospects for development, that is particularly true of Malaysia,
Indonesia and Thailand” – IMF Director on the Pacific Rim, [10/96]
debated, but a few things are clear:
110
* Overvalued currencies made exporting more difficult
100 IMF likely to resume
lending under $40 bn
* Fixed FX rates allowed Asian companies to borrow
90 package [04/98] US$, without sufficient FX revenue to repay them
“Most Asian currencies are pegged directly
to the dollar or to a basket of currencies. * There was an emphasis on consumption over
80 That means U.S. investors don't have to investment (reflected in growing current account
70 worry much about currency risk in these deficits), and a lot of foreign capital was diverted to
countries”...“In situations like Mexico’s,
where there is a cascading disorderly “We’ve been very impressed commercial property
60
devaluation, that the currency exposure by the negotiations with the
50 becomes a real negative.” “I’d invest almost new Cabinet” – IMF [04/98] There are a few similarities here with Greece and
half [a portfolio] in emerging Asian equity Spain. Note that a lot of these capital inflows into Asia
40 markets” - Morgan Stanley Strategist in took place just 2-3 years after the implosion of Mexico.
Fortune Magazine [12/95]
30 Investors believed that faster growing and more stable
Dec-95 May-96 Oct-96 Mar-97 Aug-97 Jan-98 Jun-98 economies would not present the same kind of risks as
Source: Bloomberg. Mexico. Asian equities fell by 66% in 1998, and
currencies like the Indonesian Rupiah fell by 80%.
China
Guangdong International Trust & Investment Corp debt price The China GITIC episode is reminiscent in some ways
of Dubai Ports, Abu Dhabi, etc. Foreign capital made its
100 “Comfort letters” indicate
way into Chinese Trust Companies out of the notion that
state “support” for loans to China would always make good on Trust Company
companies such as GITIC debts, if they went bad. After all, why would China
80 jeopardize inflows at a time of desperately needed
foreign capital? Well, they did: GITIC defaulted on its
60 $3 bn in Eurobonds, Yankee bonds (offered in the US)
and Samurai bonds (sold in Japan) despite its status as a
“The [Chinese Supreme] Court determined state-owned enterprise. The bankruptcy process was
40 that most, in not all, of the governmental opaque, and witnessed the “disappearance” of certain
organizations has issued the [loan] assets, as they were related to sectors that were off-limits
20 guarantees illegally“ - Multinational to foreign investors without special licenses.
Business Review [Spring 2003]
Michael Cembalest
0
Chief Investment Officer
Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 J.P. Morgan Private Bank
Source: Gerson Lehman Group.
 March 1, 2010
Sovereign default time capsule: what people were saying in real time as debt and currency crises played out
From the unthinkable, to the possible, the unavoidable, the actual and finally, the patently obvious
All the quotations included herein were drawn from public sources and are available upon request, including Bloomberg News, the New
York Times, academic papers, Fortune, Middle East Economic Digest, Multinational Business Review and IMF/World Bank papers.

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