Do financial markets think Spain will default?

Sorta!

But that won't stop the government and european authorities from inflicting pain on their populations in the name of fiscal austerity.

As I'm sure Maladjusted's readers already know, Spain is the latest object of European sovereign debt fears. Following Greece's lead, Spain's borrowing costs have increased over the last two months on concerns that the government won't be able to service it's debt and will face a rollover crisis. As a consequence the government is moving ahead with large austerity plans--cutting spending and raising taxes while unemployment remains above 20 percent.

Advocates of austerity claim that if the government doesn't make tough choices to bring down its deficit and reassure creditors interest rates will spike emerging market-style, causing the debt to explode. Spain, the argument goes, will find itself forced to default on its debt, potentially bringing down the whole Eurozone with it.

Austerity advocates, in other words, argue that markets think Spain is in danger of defaulting, and if we don't heed their warning we'll have serious trouble. But first of all, that's a stupid anthropomorphism (markets don't have agency or thoughts, last time I checked). But more to the point, assuming markets are capable of "thinking" anything, do they actually think Spain is in danger of defaulting?

Well, one way of answering that question is to use the price of credit default swaps (CDS) on Spain's public debt--that is, how much it costs to insure oneself against the possibility of a default.

[Spain: Implicit probably of default, April-July, 2010]

The graph above, courtesy of Maladjusted Graphs™, shows the "implicit" probability of default on Spain's government bonds. The idea is simple: the price of ensuring oneself against a default should reflect the chance of default and how much of their money investors expect to get back in the event of a default (i.e. how big of a "haircut" bondholders expect). In other words, the price of a CDS should equal the chance of default times the haircut rate. The price to insure oneself against default is higher the higher the expected chance of default and the larger the haircut.

So, the orange line above shows the implicit probability of default under a relatively optimistic assumption about the size of expected haircuts. In this case, I'm assuming markets only expect to lose $10 on every $100 worth of bonds. As can be seen above, under this assumption at the beginning of April markets only thought there was an 11% chance of default. But then as all the sovereign debt hysteria surrounding Greece started making headlines markets started to "think" the chance of default was much higher, reaching 28% on May 6.

But here's the thing. This is only the case if markets expect the default to be a very small one. Getting back 90% of your money when a government defaults is relatively rare in the history of sovereign debt crises.

So, what if we assume Spain is like Argentina or Russia and if the government defaults investors would only get back $30 for every $100? Well, the yellow line above shows just this scenario, and as can be seen the chance of default is really, really low. In fact, the crisis hysteria back in May shows up as nothing but a tiny blip, peaking at a terrifying 3.9%!

So what's the moral of the story?

The fact of the matter is that if markets really do think a default is likely, it's not reflected in market prices, which are, after all, the only coherent measure of what markets "think." That, or they don't expect to take a very big hit in the unlikely event the government decides to default.

In other words, markets either think Spain is like Argentina but the actual chance of default is really low or they think the chance of default is high but don't expect to actually lose any significant amount of money.

Then do the markets think Spain will default? Sorta! Should the government heed their warning? No! But that doesn't mean it can't seriously structurally maladjust itself to fight imaginary threats in the meantime.

Weekend Update

Shall we begin:

• Our journey through the intertubes begins with the 10 year commemoration of beloved Plan Colombia, which was last Tuesday. WOLA has the good word.  Despite the popular belief that it has been a "success", WOLA writes:
  
  

  Looked at more closely, though, Colombia’s security gains are partial, possibly reversible, and weighed down by “collateral damage.” They have carried a great cost in lives and resources. Progress on security has been stagnating, and even reversing. Scandals show that the government carrying out these security policies has harmed human rights and democratic institutions. Progress against illegal drug supplies has been disappointing. And wealth is being concentrated in ever fewer hands.

  
  Check out the link to read the whole report, complete with all the statistics (complete with pretty charts) to back it up.
  
• In the polling department, Otto's got the breakdown in Peru. Puts it better than I could, so in his own words: "Lord help the world, Keiko "I'm not the continuation of Fujimori policies" Fujimori (make that Fuji-Freakin-Mori) is ahead with 22% of voter intention. Second is Luis "Interesting" Castañeda and third....still creeping up...is ex-Pres Alejandro Toledo, who still has my five bucks as most likely winner right now (and I'm no real fan of his, before you say anything)."
  
• Sue Myrick (R-NC) takes home the "wild-eyed theory of the week", from Peter Krupa at Lat/Am Daily. Ladies and gentleman, your U.S Congress.
  
• Great post at the Mex Files on a Spanish vocab website that is "entertaining and instructing in equal measure". Check out some hilarious examples. Or check out the site itself, "Effective Swearing in the D.F."
  
• Colombia made a totally unsurprising announcement, saying there are guerilla camps on the Venezuelan side of the border. They even gave the coordinates, 23 kilometers from the border. C'mon Colombia, that's a pretty big, remote border. I'm not impressed. I also would disagree with Boz that Uribe is doing Santos a favor by taking the hit right before he leaves office. If Santos denounces the whole thing and calls for dialogue with Chavez directly then maybe he makes out okay, but it is pretty unreasonable to think that Chavez wouldn't hold Santos, who was responsible for the raid into Ecuador, as equally responsible for this.  There was just no need to make a big public display over this except to do exactly that; make a big public display.  Now Colombia says they will take it to the OAS on Thursday. If you want to listen to the whole thing, you can do it at the OAS website, might prove entertaining.
  
• Benjamin Dangl at Upside Down World, shares his Foreward to Raul Zibechi's book, "Dispersing Power: Social Movements as Anti-State Forces", recently translated into English.  To read some recent article's of Zibechi's, check them out at Foreign Policy in Focus.
  
• Good and bad news out of the case that pitted "Crude" director Joe Berlinger against Chevron, another subplot of the $28 billion lawsuit against Chevron brought by communities in Ecuador's Amazon. Lisa Derrick, at La Figa (FDL) has the dirty details.  Berlinger still has to hand over footage to Chevron, but conversations "with defendants, lawyers and their families are protected."
  
• The New York Times has a long article on "cattle-ranching drug barons" who are destroying parts of the Maya Biosphere Reserve, the largest swatch of protected land in Central America. 
  
• Great article (in Spanish) in La Jornada, on the reasons why both the National party and Liberal party are pushing for Zelaya's return to Honduras. The National party wants to gain recognition from countries other than Peru and Colombia, the Liberal party needs him to avoid marginalization, and it's the first priority of the Resistance, who just appointed him coordinator. For more on Zelaya's relations with the Liberal party and the Resistance, and for all your Honduran needs, be sure to keep apace with Honduras Culture and Politics.
  
• In the latest example of the US' intervention in Central America coming back to haunt them...and others, the Washington Post has a long report on how Mexican drug cartels are stepping up their use of grenades. And where did they find all these grenades? From the WaPo: "The administrations of Ronald Reagan and George H.W. Bush sent 300,000 hand grenades to friendly regimes in Central America to fight leftist insurgents in the civil wars of the 1980s and early 1990s, according to declassified military data obtained through the Freedom of Information Act by the Federation of American Scientists." And according to the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, some 90% of the grenades in Mexico are at least 20 years old. Check out the article for more.
  
• A real interesting article in the Economist on Brazil becoming "one of the world's biggest aid donors." Like China, Brazilian aid does not come with "Western-style conditions". The head of Brazil's development agency explains, "Marco Farani, the head of ABC, argues there is a specifically Brazilian way of doing aid, based on the social programmes that have accompanied its recent economic success. Brazil has a comparative advantage, he says, in providing HIV/AIDS treatment to the poor and in conditional cash-transfer schemes like Bolsa Família. Its tropical-agriculture research is among the world’s best. But Brazil also still receives aid so, for good or ill, its aid programme is eroding the distinction between donors and recipients, thus undermining the old system of donor-dictated, top-down aid." Sounds like a positive development, although problems clearly remain as the Economist article notes.
  
• The generally odious Andres Oppenheimer writes something worth a damn for a change. Comparing the US' denial of a visa for Hollman Morris to "a page right out of the Cuba-North Korea-Iran playbook." Most interesting fact from the piece though comes from the PEN Club, a free press group, who estimate that "about 250 academics, journalists and writers had their visa denied between 2001 and the end of the Bush administration," for ideological reasons. 
  
• Finally, mad props to Argentina, who passed a law recognizing same-sex marriages last week. Glenn Greenwald has a nice take and relates it to the treatment of the issue in the U.S. Greenwald writes, "That's what is most striking here:  this is not happening in some small Northern European country renown for its ahead-of-the-curve social progressivism (though gay marriage or civil unions are now the norm in Western Europe).   Just as is true for Brazil, which I've written about before with regard to my personal situation, Argentina is a country with a fairly recent history of dictatorships, an overwhelmingly Catholic population (at least in name), and pervasive social conservatism, with extreme restrictions on abortion rights similar to those found on much of the continent.  The Catholic Church in Argentina vehemently opposed the enactment of this law.  But no matter.  Ending discrimination against same-sex couples is understood as a matter of basic equality, not social progressivism, and it thus commands widespread support." For the contrast with the U.S., check out the link.

Warning: This movie may contain revolution footage

From the San Francisco Chronicle review of "South of the Border":


Advisory: Violence, corpses, revolution footage.

Really? Don't want to rile up the youth I suppose.





(image from vencentral)

Who said the press was free

This needs no additional commentary, from Jeremy Bigwood writing for NACLA:

Buying Venezuela’s Press With U.S. Tax Dollars

The U.S. State Department is secretly funneling millions of dollars to Latin American journalists, according to documents obtained in June under the Freedom of Information Act (FOIA). The 20 documents released to this author—including grant proposals, awards, and quarterly reports—show that between 2007 and 2009, the State Department’s little-known Bureau of Democracy, Human Rights and Labor channeled at least $4 million to journalists in Bolivia, Nicaragua, and Venezuela through the Pan American Development Foundation (PADF), a Washington-based grant maker that has worked in Latin America since 1962. Thus far, only documents pertaining to Venezuela have been released. They reveal that the PADF, collaborating with Venezuelan NGOs associated with the country’s political opposition, has been supplied with at least $700,000 to give out journalism grants and sponsor journalism education programs.

Until now, the State Department has hidden its role in funding the Venezuelan news media, one of the opposition’s most powerful weapons against President Hugo Chávez and his Bolivarian movement. The PADF, serving as an intermediary, effectively removed the government’s fingerprints from the money. Yet, as noted in a State Department document titled “Bureau/Program Specific Requirements,” the State Department’s own policies require that “all publications” funded by the department “acknowledge the support.” But the provision was simply waived for the PADF. “For the purposes of this award,” the requirements document adds, “ . . . the recipient is not required to publicly acknowledge the support of the U.S. Department of State.”

Before 2007, the largest funder of U.S. “democracy promotion” activities in Venezuela was not the State Department but the U.S. Agency for International Development (USAID), together with the National Endowment for Democracy (NED). But in 2005, these organizations’ underhanded funding was exposed by Venezuelan American attorney Eva Golinger in a series of articles, books, and lectures (disclosure: This author obtained many of the documents). After the USAID and NED covers were blown wide open—forcing USAID’s main intermediary, Development Alternatives Inc. (DAI), a Maryland–based contractor, to close its office in Caracas—the U.S. government apparently sought new funding channels, one of which the PADF appears to have provided.

Although the $700,000 allocated to the PADF, which is noted in the State Department’s requirements document, may not seem like a lot of money, the funds have been strategically used to buy off the best of Venezuela’s news media and recruit young journalists. This has been achieved by collaborating with opposition NGOs, many of which have a strong media focus. The requirements document is the only document that names any of these organizations—which was probably an oversight on the State Department’s part, since the recipients’ names and a lot of other information are excised in the rest of the documents. The requirements document names Espacio Público and Instituto Prensa y Sociedad, two leading organizations linked to the Venezuelan opposition, as recipients of “subgrants.”

I urge you to go read the whole thing. Seriously, do it. Also make sure to check out the documents for yourself.

I told you to come back for an update....

As most of you have already realized, and some of you have let me know in comments, the statement from the French Foreign Ministry that I posted yesterday was an extremely well done and brilliant hoax. Did I know that when I posted it? Yes (astute readers may have noticed the post was tagged with "yes-men").

So why didn't I tell you, the faithful readers? Simple, it would have blown their cover! As of last night, I wasn't aware of anybody who had publicly labeled it a hoax, you think I could be the first? No way. The point was for the statement to get as much attention as possible, and downright shame the French government...what if some press agency used da google and saw my blog post outing it as a hoax? I would have ruined it all! And so I'm glad I didn't, even if it was slightly deceptive. So, did any major news outlets pick it up? I don't think so, but here is a snapshot of AFP's website this morning (not sure if the link will still work):

The headline reads: "France Pledges € 17 Billion to Help Haiti".

Okay, so my guess is that this is actually just part of the hoax (I swear, I don't know). In any case, today there are multiple news stories about how a fake press statement went out, but you know what? Mission accomplished. As Brooke Jarvis writes for YES!:

While the fake news release—a common tactic of the prankster activists the Yes Men, but not yet traced to a particular group—doesn’t seem to have fooled any major news outlets, it did bring the debt (and its contradiction with France’s public stance) into the spotlight.

And after all, that is what it is all about. So to those aspiring "Yes-Men" out there, keep up the good work.

BREAKING NEWS: France finally agrees to pay colonial debt to Haiti

The following is a press release that went out this morning from the French Ministry of Foreign Affairs, check the link for the video:

FOR IMMEDIATE RELEASE

JULY 14, 2010

France leads Haiti donors with €17 billion pledge
New reconstruction framework marks "new era of cooperation"

Video: www.diplomatiegov.fr/

PARIS--France today announced the boldest initiative yet for Haiti's reconstruction following the devastating January 12 earthquake. In a press conference this morning, the French Ministry of Foreign and European Affairs unveiled a new bilateral Framework Initiative for Haiti's Reconstruction (FIHR).

A spokesperson for Minister Bernard Kouchner emphasized in a special Bastille Day address that the new agreement marked "the dawn of a new era of cooperation between France and Haiti."

"Whereas our nations' relations were, historically, at times tumultuous, today we start with a clean slate united by compassion and cooperation," Ministry spokesperson Natalie Lacroix stated.

Under the FIHR, France has committed to pay back the historic indemnity of 90 million gold francs which Haiti paid to the French republic following the Caribbean nation's independence from France. Including adjustments for inflation and a minimal interest rate of 5 percent per annum, this sum is today valued at € 17 billion (21 billion USD).

Lacroix stated: "In the context of the present global financial crisis, some will say this is no time for the launch of such an ambitious initiative. Yet it is precisely in such times of crisis, particularly as we work to rebuild the global financial system, that our deepest-held values are most important. 'Liberty, equality and fraternity': these must be the pillars of the new global financial architecture if we want to assure that-this time around-Haitians too can share in economic development."

The Ministry is encouraging other governments to follow the French example, and "take responsibility and action to correct the mistakes of the past in this hour of Haiti's greatest need."

The Ministry's full statement is available at: www.diplomatiegov.fr/

Media Contact:
Laurence Fabre
Tel : (+33) 970 44 6727
Email : presse@diplomatiegov.fr

Great statement, and about damn time! Hopefully other governments follow this extraordinary move by France. Check back tomorrow for an update.

More on capital controls from writers less lazy than me!

That's right: more productive corners of the intertubes have been busy covering the ongoing debate on capital controls. As our readers might recall, the IMF reversed it's long standing opposition to their use, accepting them as part of a macroeconomy's "policy toolkit." Dani "master of development policy" Rodrik referred to the IMF's policy change as "the end of an era of finance." True Stuff.

Well that was sooooo a few months ago.

Now Ilene Grabel over at Triple Crisis quite correctly points out that capital controls have become part of the "new normal" of the aftermath of the financial crisis. In other words, what was considered sacrilege before the world downturn has been, if not openly endorsed, for the most part accepted:

"But something happened on the way out of the global financial crisis. Policymakers have been quietly imposing a variety of capital controls, often marketing them with Madison Avenue savvy simply as prudential tools (akin to what Epstein, Grabel and Jomo KS termed “capital management techniques”)...The “market’s response” to these various controls—a surprising silence and, in some cases, tacit approval. The response by economists at the IMF has been in the same vein... And so it is that capital controls have quietly become another element of the new normal."

Also, Kavaljit Singh over at Vox has a very nice column reviewing new capital controls to curb volatility and increasing speculative financial flows in South Korea and Indonesia:

These new curbs are in response to growing concerns over short-term capital inflows. Given the historically low levels of interest rates in most developed countries, Indonesia has received large capital inflows since 2009. Unlike other Asian economies such as Singapore and Malaysia, the Indonesian economy showed some resilience during the global financial crisis. Despite hiccups in the financial markets, the Indonesian economy registered a positive growth of 6.0% in 2008 and 4.5% in 2009, largely due to strong domestic consumption and the dominance of natural resource commodities in its export basket... Yet due to the massive speculative capital inflows, the Indonesian authorities remain concerned that its economy might be destabilised if foreign investors decide to pull their money out quickly... Analysts believe that these policy measures may deter hot money inflows into the country and monetary policy may become more effective. Yet they expect tougher measures in the future if volatility in capital flows persists.

In anycase, quit hanging around here and go read these two excellent pieces yourself.