4 ms·

Sovereigns do not play by the same rules as the rest of us. They can unilaterally declare their debt to be in their new currencies, if they separate. If each c

by yxhuvud 15y ago

Sovereigns do not play by the same rules as the rest of us. They can unilaterally declare their debt to be in their new currencies, if they separate. If each country leaves the Euro, then this will definitely happen. If only some does, then it will be up to the courts to decide what the treaties says.

Tichy 15y ago
Of course they could, but there might be consequences. For example nobody might be willing to lend them money again in the future. Or there might be wars ("if you don't want to pay me what you owe me, I am going to take it by force"). Overall, who is going to guarantee a contract between states (like money lending)? There is no superpower that watches over them and punishes them if they do wrong, they have to fight it out among themselves somehow.
- yxhuvud 15y ago
  Considering Greece has been in default for about half of its modern existence (since the early-mid 19th century) and still has been able to lend - I think the danger of not being able to lend is nil. Also note that most of the contracts is not between states but between citizens, banks and other companies. As for wars - forcing sovereign nations to pay debts in currencies they cannot pay is also a way to get wars. The post WWI war reparations and how they paved the way for Hitler[] is a good example of this. [] Godwin, but I do think the example is relevant.
antr 15y ago
You are misreading the comment while making untrue economic and policy comments. "They can unilaterally declare their debt to be in their new currencies, if they separate." is juts a wrong statement. How is sovereign debt different from corporate debt? Do you have an example? Example: If Italy goes back to the Lira, the face value of Italian debt that the U.S. Government holds, in dollar terms, will not change, even if that debt is changed to Lira, IT IS NOT re-valued to a price the Italian Govt. sees fit. Should a devaluation of the debt occur, the U.S. would have to write-off billions from its balance sheet (assuming a devaluation of the Lira occurs, which is most certain). If each country does this, billions will have to be written off, there isn't such thing as "Sovereigns do not play by the same rules as the rest of us.". I suggest you read any debt offering memorandum from any European Government or even the U.S. Government, all terms, clauses, reps/warranties are clearly explained and detailed.
- barrkel 15y ago
  Sovereigns are exactly that: sovereign. They create the law. What court do you think you're going to take a country to when they default on a bond? Which court is going to force them to pay? And under which set of laws? Sovereigns can rewrite the law to change the terms of these contracts. What they can't control is how (allegedly independent) third-party ratings agencies rate their bonds, and declare whether a credit event has occurred or not (triggering insurance etc).
  - antr 15y ago
    you missed the whole first point. Anyways, i'm happy you are happy with your answer.
    - barrkel 15y ago
      What first point? How sovereign debt is different from corporate debt? Because it is different, and I explained why. It's commonly mentioned in articles on sovereign debt. Single example: http://blogs.reuters.com/felix-salmon/2011/11/20/cds-conspiracy-theory-du-jour-gretchen-morgenson-edition/ http://blogs.reuters.com/felix-salmon/2011/11/20/cds-conspir... "Everybody knows that Greece can and should take some kind of tactical advantage of the fact that most of its debt has been issued under Greek domestic law."
- yxhuvud 15y ago
  Most of the debt Italy has taken has been taken under Italian laws. The Italian government can rewrite those laws at will. Sovereigns define their own laws as they see fit - that is the meaning of being sovereign. Sovereigns entering obligations under laws not their own is a totally different thing though, and cannot be changed this simple though. As to how the US would react in such a hypothetical scenario, they'd probably send diplomats to Italy to try to bend some arms and influence the terms to be better for them, but it is the Italian government that is the bookkeeper for deals made under their own laws.
barrkel 15y ago
This is true, but it is not sovereigns that determine whether they are in default or not; "credit events" are determined by third parties. When they're triggered, CDSes and other forms of insurance may become payable. This is also why splitting up isn't necessarily going to fix much. Lots of banks are only solvent so long as they can hold many of these bonds on par on their books. Start having credit events, and crystallizing losses, and you get one bank after another falling over. It's the fear of bank failure dominoes that is keeping credit out of the market; ironically, this fear of insolvency is destroying liquidity, which in turn is increasing insolvency risks - as long as banks are liquid, they can live indefinitely on the money they skim off the rate difference between their assets and liabilities. The ECB is in fact surreptitiously keeping the system afloat by purchasing bonds, but not liking it at all. There's no simple solution to the whole mess; no matter what happens, I think it's going to be painful.

by yxhuvud 15y ago

Tichy 15y ago

Of course they could, but there might be consequences. For example nobody might be willing to lend them money again in the future. Or there might be wars ("if you don't want to pay me what you owe me, I am going to take it by force"). Overall, who is going to guarantee a contract between states (like money lending)? There is no superpower that watches over them and punishes them if they do wrong, they have to fight it out among themselves somehow.

yxhuvud 15y ago
Considering Greece has been in default for about half of its modern existence (since the early-mid 19th century) and still has been able to lend - I think the danger of not being able to lend is nil. Also note that most of the contracts is not between states but between citizens, banks and other companies. As for wars - forcing sovereign nations to pay debts in currencies they cannot pay is also a way to get wars. The post WWI war reparations and how they paved the way for Hitler[] is a good example of this. [] Godwin, but I do think the example is relevant.

antr 15y ago

You are misreading the comment while making untrue economic and policy comments. "They can unilaterally declare their debt to be in their new currencies, if they separate." is juts a wrong statement. How is sovereign debt different from corporate debt? Do you have an example? Example: If Italy goes back to the Lira, the face value of Italian debt that the U.S. Government holds, in dollar terms, will not change, even if that debt is changed to Lira, IT IS NOT re-valued to a price the Italian Govt. sees fit. Should a devaluation of the debt occur, the U.S. would have to write-off billions from its balance sheet (assuming a devaluation of the Lira occurs, which is most certain). If each country does this, billions will have to be written off, there isn't such thing as "Sovereigns do not play by the same rules as the rest of us.". I suggest you read any debt offering memorandum from any European Government or even the U.S. Government, all terms, clauses, reps/warranties are clearly explained and detailed.

barrkel 15y ago
Sovereigns are exactly that: sovereign. They create the law. What court do you think you're going to take a country to when they default on a bond? Which court is going to force them to pay? And under which set of laws? Sovereigns can rewrite the law to change the terms of these contracts. What they can't control is how (allegedly independent) third-party ratings agencies rate their bonds, and declare whether a credit event has occurred or not (triggering insurance etc).
- antr 15y ago
  you missed the whole first point. Anyways, i'm happy you are happy with your answer.
  - barrkel 15y ago
    What first point? How sovereign debt is different from corporate debt? Because it is different, and I explained why. It's commonly mentioned in articles on sovereign debt. Single example: http://blogs.reuters.com/felix-salmon/2011/11/20/cds-conspiracy-theory-du-jour-gretchen-morgenson-edition/ http://blogs.reuters.com/felix-salmon/2011/11/20/cds-conspir... "Everybody knows that Greece can and should take some kind of tactical advantage of the fact that most of its debt has been issued under Greek domestic law."
yxhuvud 15y ago
Most of the debt Italy has taken has been taken under Italian laws. The Italian government can rewrite those laws at will. Sovereigns define their own laws as they see fit - that is the meaning of being sovereign. Sovereigns entering obligations under laws not their own is a totally different thing though, and cannot be changed this simple though. As to how the US would react in such a hypothetical scenario, they'd probably send diplomats to Italy to try to bend some arms and influence the terms to be better for them, but it is the Italian government that is the bookkeeper for deals made under their own laws.

barrkel 15y ago

This is true, but it is not sovereigns that determine whether they are in default or not; "credit events" are determined by third parties. When they're triggered, CDSes and other forms of insurance may become payable. This is also why splitting up isn't necessarily going to fix much. Lots of banks are only solvent so long as they can hold many of these bonds on par on their books. Start having credit events, and crystallizing losses, and you get one bank after another falling over. It's the fear of bank failure dominoes that is keeping credit out of the market; ironically, this fear of insolvency is destroying liquidity, which in turn is increasing insolvency risks - as long as banks are liquid, they can live indefinitely on the money they skim off the rate difference between their assets and liabilities. The ECB is in fact surreptitiously keeping the system afloat by purchasing bonds, but not liking it at all. There's no simple solution to the whole mess; no matter what happens, I think it's going to be painful.