Armand Mares on Sov Debt, lunch notes

Arnaud Mares
Morgan Stanley Sov Risk

How big are the losses?
How will they be allocated?
Debt to GDP is not a good barometer to watch. Has been high before. So why worry now? In the case of e UK, which had a very high ratio at ww2 period, on a narrow govt base?

So why worry now?
Answer, in the past the govt debt was the only thing to worry about, now we have all sorts of continuing fiscal and social and private debt issues.

Definitions:
The power to tax isls the npv of future tax revs.
Social liability is the npv of future govt expenditure. If the peoples balance sheet is negative, some part of it must take a loss.

Assets: power to tax and assets like stocks, RE etc
Liab: social liability plus gross debt.

Govt can only raise capital via unsecured senior debt. Cant transfer a claim of public assets, politically untenable.

Two ways out:
Debase...France did this post ww1 and the UK post ww2.
Pay off current and force new buyers to accept low rates of return on new paper.

Inflation plusa cramdowns are likely feature of the "fix".

With high levels of debt a hundred bps rise in rates means a 1.25x rise in fiscal balance primary surplus to keep debt stable is required.
So then the CBs have to step in to maintain a low borrowing rate, which means that private creditors becoming subordinated. The solvency of these countries has not been improved at all. If Ireland defaults, the bonfire for Spain and Italy will be lit.

Concludes by saying outright default is not an option, but rather a gradual default via rate cramdowns and or inflation.

Another result will be increased fiscal union.

Higher tolerance of inflation and govt control centralized control of debt. This means that individual sov debt of troubles govts is becoming SUBORDINATED to larger entities such as the IMF.