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The Dominoes Keep Falling: Leftward Lurches And EM Defaults

Sometimes one big event dominates the landscape, like last week when the Fed raised interest rates. Other times a bunch of less-universally-significant-things add up to a meaningful story. And the story that follows here is, of course (given the venue), ominous.

First up is the much-discussed US$9 trillion that developing countries borrowed back when the dollar was weak and their currencies were relatively strong. Pundits have been warning that with the dollar soaring this debt was largely underwater and therefore a threat. But as far as anyone could tell it wasn’t blowing anything up.

Then on Friday a big Mexican construction company defaulted:

ICA Skips Debt Payment as $1.35 Billion Bond Default Looms

(Bloomberg) – Empresas ICA SAB will skip a debt payment due by the end of the month as Mexico’s biggest construction company heads for the nation’s biggest default in at least two decades. Stocks and bonds declined.

The builder won’t pay $31 million in interest on its $700 million in bonds maturing in 2024, the company said Friday in a statement. ICA was using a 30-day grace period that ends Dec. 29. The company will be forced to halt payments on all of its $1.35 billion in overseas notes, eclipsing glassmaker Vitro SAB as the biggest corporate bond defaulter in Mexico since Moody’s Investors Service began tracking the data in 1995, according to the rating company.

The announcement caps a year in which ICA posted its biggest quarterly loss in 14 years as the government cut back infrastructure projects and the plunge in Mexico’s peso drove up the company’s leverage. The company will work on a cost-cutting and restructuring plan to be completed by mid-February, advised by Rothschild & Co. and FTI Consulting. ICA appointed board member Alfonso Gonzalez Migoya as co-chief executive officer.

ICA had coupon payments looming over the next two months for its two other dollar bonds maturing in 2017 and 2021, with the first one due Jan. 24. The company reported total debt of 57.9 billion pesos as of September 30.

Now multiply the above by, oh, a thousand, and you get a sense of what could happen in 2016 if the dollar stays strong, commodity prices stay low, and the other big dollar borrowers start toppling.

Next, we got to see how a formerly-well-run country responds to a financial crisis brought about by overspending and rampant corruption: It replaces its rock-solid, fiscally responsible finance minister with a political operative more open to spending whatever it takes to keep the incumbents in power.

Brazil’s New Finance Minister Faces a Big Test After Friday’s Rout

(Bloomberg) – Nelson Barbosa could, of course, turn out to be the man who fixes Brazil’s finances, tames soaring inflation and revives the sinking economy, but investors sure aren’t betting on it.

As word spread across Sao Paulo trading floors Friday that Barbosa would be the country’s next finance minister, replacing the beleaguered Joaquim Levy, markets plunged. By day’s end, the currency was down 2.6 percent, stocks 3 percent.

That harsh reception is the exact opposite of the broad rally that greeted Levy when he took the post a year earlier. Levy, though, was the market’s golden boy, with his University of Chicago-training, asset-manager experience and reputation as a fierce budget cutter. Barbosa, while generally respected by analysts for his technocratic skills, isn’t seen as being quite as tight-fisted on spending, a perception he only reinforced when suggesting Friday that he was amenable to granting subsidies to some industries.

What’s more, the crisis that Barbosa will step into when he’s officially sworn in Monday is markedly more severe than it was a year ago. The economy is now shrinking at a 7 percent annual pace; the budget deficit has swelled to the widest in at least two decades; the country’s investment-grade rating is gone; Congress is bogged down in impeachment proceedings against President Dilma Rousseff; and the greatest corruption scandal the country has ever known is showing little sign of abating. If Levy couldn’t stem the crisis when it was more manageable before, what reason is there to believe Barbosa will now?

Brazil — once viewed as the Latin American country that got it right — had a strong currency, steady growth and a more-or-less balanced budget for much of the past decade. But it eventually fell back into the old pattern of over-spending, over-borrowing and divvying up taxpayer wealth among ruling elites. Now it’s at a crossroads, with one branch leading to more debt and eventual dissolution, and the other leading to short-term pain but a chance at long-term sustainability. In other words, Brazil is pretty much where the US, Europe and Japan are. And based on the above personnel decision, it’s decided to follow the developed world down the path to financial oblivion.

And last but not least, Spain has joined the lengthening list of European countries where anti-euro parties are taking power:

Spanish election: PM Rajoy’s party loses majority

(BBC) – Spain’s governing conservative party has won the most seats in the general election but has lost its majority and must now try to form a coalition.

With almost all votes counted, the Popular Party (PP) had 123 seats; the Socialists 90 and the anti-austerity Podemos party 69. The liberal Ciudadanos party was in fourth place with 40 seats.

A spokesman for Podemos said the results showed that two-party politics in Spain had ended. “We are entering a new era in our country,” said Inigo Errejon.

Prime Minister Mariano Rajoy’s PP needed 176 seats to form a majority. It had 186 seats in the outgoing parliament. Analysts said the PP could find it very difficult to form a government because it can’t achieve a majority in parliament in coalition with Ciudadanos, its most natural partner. The Socialists, on the other hand, could form a pact with Podemos and Ciudadanos.

As in much of the rest of Europe, Spanish voters have decided that the status quo isn’t working so they’re considering alternatives. Here, it’s mainly Podemos, a left-wing, anti-austerity party along the lines of Syriza in Greece and the far-left party (which includes local communists) that just took power in Portugal. Should Podemos and the socialists form a coalition it would likely oppose more cuts in government spending and insist on higher deficits and more debt, setting up yet another conflict with Germany.

So what story do these three events combine to tell? Too much debt makes a country ungovernable, leading to political chaos which in turn leads to even more debt, and so on until a crisis interrupts the cycle. And where in the past this kind of thing was usually an isolated occurrence, today it’s the global new normal. We’re all functionally broke and, therefore, in various stages of an epic crash-and-burn. Stuff like the above will soon be everywhere.

18 thoughts on "The Dominoes Keep Falling: Leftward Lurches And EM Defaults"

  1. What will happen?
    Ralph Peters called the shot 4 or 5 years ago,violence & insurrection.
    Somewhere out there are young Mussolini’s & Franco’s ready to jump in and quiet things down,….at the point of bayonets!

  2. When one considers the insanity of all things money, from not reporting inflation, to bubble after bubble, to debt that is just not even imaginable, to the levels of poverty and the acceptance of crime that we never would have accepted just a few years ago, well it adds up to something that we are tempted to call evil, or to make excuses by saying it is all out of control, no one body DID this, it is a matter of too many moving parts and all are ignoring cause and effect, so no one can repair it either.

    But, I think it is possible that these things were set in motion intentionally, in order to make maximum gains in the short time left before it all collapses. Who knows, major governments may well know of an icy planetoid on a deadly trajectory headed our way that will leave very few people alive and certainly end civilization as we know it. Maybe that icy planetoid is just a financial collapse that computers identified as a 100% unavoidable probability back in the 80’s or 90’s when it was already to late to put things right, so if it is all going to go catastrophically wrong we better stash as much wealth as possible while we can so that there is something to rebuild with when the smoke clears.

    I don’t know how plausible that all is, the whole 2012 scenario, building ships in Tibet and all, but I do know a civilization is built on trust and my trust is broken, in spite of a lifetime spent as an optimist.

    At this point the faint hope of rescue has to lay in the revelation of some huge news like free clean energy and advances in robotics that make work a thing of the past for all but the few who enjoy their work. That could save our butts, but it is also akin to winning the Powerball in the odds department. And if recent history is a guide those possibilities that can save us also will be turned to exploitation by a few hundred really greedy people who own the planet and the rest of us can just die and they will not bat an eyelash, more for them.

  3. Unfortunately, this is the tip of the iceberg, the numbers the government are releasing just do not add up. A major, major world wide correction is coming very soon and it will be a dandy. Unfortunately for us the stage is also set world wide for a world war and all it will take is blink at the wrong time. World leaders will lust for a war to wipe away debt.

  4. Woodrow Wilson was JP Morgan collage roommate so young . In 1913 selling out the country was easy for them! Now the FED kills us !

  5. Someday maybe they will figure out that DEBT is SIN and the wages of SIN is…..
    What ever happened to pay as you go?

    What is the result when Lucifer gives you a loan….and one day you can’t make payment.

  6. It occurred to me while reading the article that, maybe the whole world is on a course or Cloward and Piven. Politicians are egomaniacs and will not succumb to discipline, so ride the wave. There exists (I’m sure) a plan by the IMF or some other world entity of what to do when the whole world system collapses (Just read Rev 13 this morning)

  7. Yep, I noticed, America is on the same path. Many on both sides of the political spectrum are looking and sounding ever more radical. The only possible solution is to raise government income to pay down the ever increasing debt. If we cut social programs we will get internal strife. So we must cut spending and raise taxes while not inciting riots. Alternatively we can just wait until the meltdown and then react. This is likely what will happen. Great Depression 2.

    1. Everyone is on the run away train, but no one is looking out the window. When it finally leaves the track, no one seen it coming. Someone will get the blame, Putin or Red China anyone but the ones who caused it.
      There is no way to fix the system, the system is the problem and it has to crash and burn before anyone can fix it. Just like you said anyone talks about cutting anything is bad. Anyone who gives out “free” things is good.
      Raise government income and they will spend more to win elections.
      Its a trap and the only way out is ugly.

    1. TTT< The perceived scarcity of an asset can also result in a bull market as can overall economic optimism, as with the property boom in the US several years ago which brought about a lot of consumer spending and general economic optimism. This boosted almost every market; stocks, commodities and bond markets and the general economic optimism during that period promoted bull markets. open your free account »

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