Monday, March 22, 2010

A Final Note Regarding PIIGS Debt

I want to issue a clarification on the statements I made yesterday and Saturday. I am in no way saying these bonds are good purchases or that the fiscal situations in these countries are OK. Austerity measures will probably hurt recoveries, people who's benefits are cut are going to be pissed, and politicians are going to have to do some very unpopular things. A good place to look for inspiration, as The Economist noted, is Eastern Europe. My point was that the problems these nations are facing, particularly Greece, are deep problems that have been long ignored. Greece's issue is not that it's facing unfavorable refinancing rates, it's that it needs to finance debt service, something that David Merkel very eloquently covered with his post You Can't Cheat an Honest Man.

With that said, I'll leave you with a little excerpt from Hyman Minsky's wikipedia page:

For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments

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