Saturday, 19 February 2011

Domestic and external debt after crises...

Hello everyone, I have another short post for today. I’m also working on a larger one that needs some research, so it will take a bit more time.

While browsing through data for this larger future post, I stumbled upon external and domestic debt data for Thailand. The evolution of the two following the 1997 crisis is interesting.

As it is very often the case during a crisis, there is a total loss of confidence in the crisis-stricken country,  especially among foreign investors. Hence, the government finds it difficult to issue external debt in order to fund the measures thought of as necessary in order to deal with the crisis.

As a result, those governments that have the option to issue domestic debt, tend to do so. There were a few such examples in 2010, not just by central governments but also by banks and local governments (I won’t go into detailing them here).

This is what happened in Thailand following the 1997 financial crisis, domestic debt rose vertically and external debt continued its decline until 2006 when the relevant data run.

source: Bank of Thailand

source: Bank of Thailand

Is there anything here that allows us to draw parallels with Greece? As far as the current situation is concerned, no, since in this case we are talking about a sovereign debt crisis that spread to the banking sector. This means that the public’s faith in its government ability to repay any debt is worn thin. Although, there were some efforts to market newly issued government bonds to retail investors, but if my memory serves me right, this was before the IMF/EU induced rescue.

It highlights though, the probability that should Greece default on its debt or invoke a large haircut on international bondholders, then the country is bound to find itself shut out of the international capital markets for a number of years (besides the example of Thailand, the case of Russia after its 1998 default springs to mind). Maybe, if this scenario materializes (and believe me I pray every night that it won’t), then this will seem more relevant...

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