Foreign debt default shock?

Investment Analysis Clubs Macro Economic Trends and Risks
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The U.S. stock market is declining as the Federal Reserve is letting the air out of the bubble it created with excess monetary stimulus. At this time, the decline is orderly. There’s no sign of crisis.

https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…

But the markets are nervous. A “black swan” could cause a shock. Like many black swans, widespread foreign debt defaults would have been foreseen but not taken seriously as a serious danger to U.S. markets.

https://wellsfargo.bluematrix.com/links2/html/d4dd445d-eaea-…

**by Brendan McKenna, Wells Fargo Economics, June 3, 2022**

**EM Debt in Distress? We Think So, Markets Agree**

**As emerging market debt ratios and debt affordability worsen, financial market indicators of sovereign creditworthiness have deteriorated. Credit default swaps are up, while the number of governments with bonds trading at distressed levels has jumped. For now, only Sri Lanka has defaulted; however, we believe multiple sovereigns are on the brink of imminent default. Should these governments miss payments, this new wave of EM sovereign defaults would be on par with defaults we saw during the depths of COVID in 2020.... Debt ratios continue to climb, while the cost of servicing elevated debt burdens is the highest since the Global Financial Crisis of 2008-2009. ...**

**The market value of this distressed debt is around US$85B. Despite fewer countries having debt priced at distressed levels, the market value of these bonds is greater than the value seen in March 2020 and is also the highest it's been in the past 10 years....We believe a return to 2020-style emerging market sovereign defaults is not out of the question....** [end quote]

The article lists many countries in danger of default, including Russia, Ukraine, Belarus, Lebanon, etc.

The total amount involved, $85 billion, is large but not enormous in the larger picture of the total debt markets. However, we learned in 2008 that the details of who owns the debt and how leveraged they are could potentially have a large impact on the U.S. financial system.

My father used to say, “Murphy was an optimist.” So…it’s possible that this risk may affect U.S. bond and stock markets. The Asian financial crisis of 1997 (whose root cause was USD-denominated debt default) did affect the U.S. stock market. The USD has been rising lately, putting pressure on countries with USD-denominated debt.

https://www.investopedia.com/terms/a/asian-financial-crisis…

Wendy

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Wendy,

Interesting precursor to China’s downfall in the debt markets.

The trading desks are scrambling now. Wait till real panic comes into play.

I honestly think the US will sail through with a minor recession. Some financials will bite the dust in the US. The markets will tank.

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We investors need to learn that the financial universe is NOT mechanical with clear cause and effect, but rather ecological with insanely complex and difficult to predict linkages, e.g, catastrophic collapses brougnt about seemingly for “no reason at all”,

https://en.wikipedia.org/wiki/Catastrophe_theory.

GCC is already proving far more costly, earlier, than most predictors predicted because most people think in mechanical Newtonian rather than interconnected Humboldtian terms (“When nature is perceived as a web, its vulnerability also becomes obvious. Everything hangs together. If one thread is pulled, the whole tapestry may unravel.” Andrea Wulf’s summary [https://www.amazon.de/dp/038535066X] of the thought of the extraordinary Alexander Humboldt’s thinking from around 1800).

Finance and economies are fundamentally ecological. Yes, direct cause and effect is powerful and right in our face, but the context of interconnectedness is far more powerful, subtle, and mostly unseen and ignored.

david fb

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flyerboys, speaking of catastrophes and GCC, how did your properties do in the recent Mexican hurricane?

Wendy

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Wendy how did your properties do in the recent Mexican hurricane?

No damage at all except two recently planted trees gpt pulled out of ground roots and all and flew away into the ocean. Drainage all worked well as did structural integrity. of windows walls and roofs. Some terrible flooding and a few deaths in the mountains above us.

The hurricame also delayed our flight to Europe (where husband is contracted to sing as soloist with Malaga Symphony Orchestra) for six hours, but in so doing prevented us from arriving at our close musical friends’ house, where they discovered they had COVID and saved us from infection… complexities!

david fb

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The total amount involved, $85 billion, is large but not enormous in the larger picture of the total debt markets.

Correction: $85 billion is miniscule in the larger picture of the total debt markets.

Here’s what the world debt market really looks like:
https://www.visualcapitalist.com/global-debt-to-gdp-ratio/

Hard to imagine a default in, uh, Eritrea is going to affect the US stock/bond markets. Heck, as the article notes, Sri Lanka already defaulted, and I’ll wager nobody on this board even knew.