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Commentary

Argentina, Monetizing Debt, Insurer Dirty Play (Links)

Argentina is in some sort of a soup. A US court ruled that they must pay bondholders who "held out" against a debt restructing plan in 2005 at the same time as those who agreed to exchange their then debt at 25 cents for the dollar. Argentina had a debt default and offered a package that involved bondholders losing 3/4th of the face value, and has since been paying up those who agreed, while not paying those who said no – a group that includes Elliott Capital Management.

The US courts don’t have any jurisdiction over Argentina which is a sovereign, but they can insist that any intermediary US bank or institution that forwards Argentina’s payments must distribute the money to all US bondholders rather than just the ones that agreed to the restructuring. Argentina refuses to pay all bondholders at the same rate. It wouldn’t even pay the "bail" amount to free a large Naval Ship that was held in Ghana as collateral by one of Elliott’s subsidiaries. Interestingly, the US government is keen to side with Argentina because such a ruling can impact further such restructuring of sovereign debt held by US bondholders, especially in Europe.

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The Economist has a new theory: Central Banks to cancel Government Debt. This isn’t different from monetizing debt, but since that has already been done, and the debt is now on central bank books, the argument is that since governments effectively own central banks, they own their own debt which can be cancelled. The problem though is: what about the stuff on the other side of the balance sheet? A central bank owns government debt as assets, and its liabilities are usually the currency it issues. If it writes off the debt it owns, then does it somehow take back all the money issued? If not, this is equivalent to saying the central bank prints currency, gives it to the government, which pays it back to redeem the bonds and boom, everything is normal again; in other words, it’s just monetizing the debt in a different way. Effectively, this will cause inflation. While central banks would love a little inflation, this is like wanting a wave and getting a tsunami instead. I hope they understand.

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Subra talks about another rip-off mechanism by Life Insurance companies. By denying that a cash payment was actually paid.

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Now, Rating agencies fight about being totally blind to Deccan Chronicle’s default.

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Yves Smith of Naked Capitalism on White Collar Crime on Wall Street (Rajat Gupta’s light sentence and years earlier, Richard Whitney of the NYSE). In India, we don’t even get down to sentencing.

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