Skip to comments.Do sovereign debt ratios matter?(volatility & leverage matter more)
Posted on 07/22/2010 5:36:48 AM PDT by TigerLikesRooster
Do sovereign debt ratios matter?
Jul 20th, 2010 by Michael Pettis
Posted in Balance sheets, Banks, Financial crisis, History
In the past few weeks I have been getting a lot of questions about serial sovereign defaults and how to predict which countries will or wont suspend debt payments or otherwise get into trouble. The most common question is whether or not there is a threshold of debt (measured, say, against total GDP) above which we need to start worrying.
Perhaps because I started my career in 1987 trading defaulted and restructured bank loans during the LDC Crisis, I have spent the last 30 years as a finance history junky, obsessively reading everything I can about the history of financial markets, banking and sovereign debt crises, and international capital flows. My book, The Volatility Machine, published in 2002, examines the past 200 years of international financial crises in order to derive a theory of debt crisis using the work of Hyman Minsky and Charles Kindleberger.
No aspect of history seems to repeat itself quite as regularly as financial history. The written history of financial crises dates back at least as far back as the reign of Tiberius, when we have very good accounts of Romes 33 AD real estate crisis. No one reading about that particular crisis will find any of it strange or unfamiliar least of all the 100-million-sesterces interest-free loan the emperor had to provide (without even having read Bagehot) in order to end the panic.
(Excerpt) Read more at mpettis.com ...
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