Market Discussions

Is this the White Albatross that investors pray doesn't try to fly again.?

Can a default be spun in a positive way?


Discuss.




SH

There must be a way.

There has to be a method in place for tens to hundreds of billions to be allow for an exit from a position that can't be maintained.

SH

Im not sure if yours included an early exit or not.


Default means failure to pay an installment, which leads to a call on a loan.


We have seen calls for default after only a few days of a missed payment, is this good policy?


SH

Often these "Exit Conditions" are actually ........ "Hit By a Bus" situations.

What about plain old "The Market Fooked Me Conditions" ??


Maybe ans insurance clause?

SH

As the case of Argentina clearly shows, default is very often a good thing especially in a situation where there exists no mechanism by which the indebted party may be forced to pay the owed debt. Investors look towards the future, not the past; if a default allows a party to clear up some bad situation that has arisen, for example being choked with interest on borrowed funds, and return to profitability, then the default can be positive in the long-run; moreover, that long-run may arrive in a relatively short time. Of course, this is not something that ought to be discussed openly and blatantly by persons intending to borrow funds, as it would predispose potential lenders against lending to that party. But it is mentioned in very good detail in Joseph Stiglitz's book Making Globalization Work.

When all of the money invested is stolen in the first place, it doesn't matter.

ALL'S FAIR IN WAR

RAW23—

I prefer to be a political realist, so while I can appreciate your points (a) and (b), I am interested only in addressing point (c). I offer my sincere apology if this is offensive to you; and, if you would like some time later, I will be happy to discuss those other points. For now, I have a general statement to make which shall span two posts, and focusing exclusively on point (c) is more beneficial to the illustration of my perspective. I hope that you won't consider this methodology dishonest.

With respect to point (c), there exists the possibility of several contributing factors which may or may not be public knowledge prior to or at the time of a default. These in turn would depend on a few other factors, to include but not limited to the initial and ongoing efforts of the indebted party to maintain transparency with investors with regard to the operation of a specific business model. These contributing factors may or may not be known or knowable to the indebted party, or to the public; moreover, they may arise gradually or suddenly. Further to this, these same contributing factors may be misidentified or miscalculated, may be overlooked or ignored, and may not be apparent to either the indebted party or his investors early enough into their influence to be mitigated; or, more likely, human error in the form of negligence, hubris or fallacious logic (e.g., hindsight, sunk cost, etc.) may be culprit to the mismanagement of available resources or improper response to a given scenario.

I am intentionally vague with the above statement because there exist a preponderance potential criteria to satisfy the definition of a "contributing factor". One must consider the usual volatility of the in game market, the potential for real life to interfere with game play in unpredictable—or perhaps predictable but unavoidable—ways, or for the meta-game to suddenly change. This last point is especially poignant right now, with the advent of the Goonswarm Shrugged project. Whereas a month ago a very conservative and practical estimate of profitability in numerous sectors may have shown a tendency towards safe and sustainable growth, those same sectors may suddenly be in great disarray as the result of external speculation. By external speculation, I mean speculation on the part of individuals other than a particular indebted party. Consider for the sake of illustration a business model that relied on the use of Gallente Control Towers—owned by the indebted party or by completely unrelated third parties—in some way; for example, a reaction chain, or a tech 2 production chain, or anything secondary to such operations. Such business models, while allowing for great margins of error prior to the advent of Goonswarm Shrugged would very likely become considerably less profitable in the short-term.

I could go on to illustrate numerous other in game, meta game, or real life situations that could contribute negatively to the possibility of ongoing functions as originally planned and advertised. The point I would be making, as with the situation already outlined, is that sometimes things happen which make it impossible for the indebted party to follow the original business plan. The particular example I used is chosen because it illustrates an extreme permutation of the meta-game, in which the fault is wholly and provably external to the indebted party's ability to plan and predict; but, the same point is true even for situations that he indebted party could have—and perhaps should have—been able to predict and for which he should have reasonably been able to make alternative plans. The only factor that matters, at the end of the day when balancing the numbers, is that for whatever reason the indebted party is unable to follow the original plan.

It is in this case that it is sensible to default, especially when considering the long term both with regards to the individual indebted party and with regards to the meta-game. With regards to the individual, it displays a certain levelheadedness and practicality which I find attractive to know when it's time to call it quits. This is not to say that I endorse a sudden and impromptu default and the following disappearance of the indebted party from all channels of communication. While that is certainly in the immediate interest of the indebted party, a smash-and-grab is never good for the investor. But by openly and publicly defaulting on the original business plan and suspending payments, two positive things are accomplished: first, the indebted party is freed from having to make a certain number fit in an environment where it is increasing difficult to do so; second, the indebted party is able to turn effort and possibly capital that otherwise would have been dedicated to fighting an uphill battle against a negative environment towards more lucrative activities.

The long term goal of such measures, as with the case of Argentina's sovereign default in 2001, is to allow the indebted party to recover and then, once things have settled and the indebted party is back on his feet, to repay the balance owed. In such a situation, though I would be a bit miffed and worried in the short term (during the default and the intervening time), I cannot in good conscience look down on someone taking such actions. They are responsible; they are practical; and, despite what I am sure a great number of people on this forum will say, they have no negative effects on the long term viability of the indebted individual's ability to raise funds in the future, providing that the default is handled amicably and especially if the indebted party works toward and eventually succeeds in repaying the balance owed.

I am literally nitpicking at this point, but Argentina has managed to accrue significant external debt and investment funds in the years since 2001. That money just has not come from the IMF or the WGB; instead, there has been significant lending by Venezuela, and investment by private enterprises from such countries as the United States. More to the point, default and the resultant lack of future investment funds are only considered bad because of the implication that the lack of these those funds will result in detriment to the betterment of the defaulting party. This has certainly not been the case for Argentina after its 2001 default. The country's economy has handled the 2008-2009 global recession far better than the United States, despite the latter having never defaulted on a debt (and being pretty much incapable of doing so given that the U.S. external debt is owed in its own currency).

That one was more about business failure. This one is more about defaulting and recovery.







You spin me right round, baby
Right round like a record, baby
Right round round round





SH

But the primary deficit itself would stop being a problem if they defaulted and dropped the Euro, wouldn't it? As you note, they would be able to print their own money and this should be enough to get them through their recession without ending up with hyper-inflation shouldn't it?

The current situation and set of plans seem to be simply unsustainable. All the cuts they have imposed appear to have barely scratched the surface of the finanical problems and I doubt that it will be possible to cut much further without leading to serious revolutionary violence (perhaps not a terrible thing given the corruption endemic in Greece's current hierarchy). In fact, their debt is still growing at quite a fast pace so I cannot see any light at the end of the tunnel without some kind of default. I would very much like to hear what the other options are, though, as I haven't actually found any commentators offering a plan that they claim will actually solve the situation rather than just patching over it for a few years.