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The Great Repudiation Revisited


Back in October, I wrote a story where I argued that the U.S. was heading for a Great Repudiation of foreign debt: “Will Washington act in a way that imposes large losses on foreign investors—in effect, repudiating some of the debt?”

The looming problem of the foreign debt is a big reason why Obama’s bank rescue plan seems so weird. Christopher Whalen of Institutional Risk Analytics gets the point. He recently wrote that:

What is required in Washington is an adult conversation, between the US government on the one hand and the holders of the bonds of the largest banks on the other. Many of the bond holders of the large banks are foreign governments, central banks and investment funds and not a few of these sovereign names are in really serious financial difficulties. Since the receiverships for Lehman Brothers and Washington Mutual, where bond holders took a near total loss, these foreign investors have been vocal in demanding that US taxpayers protect them from further harm.

But to deflect these cowardly, expedient arguments, the US government must be willing to lead by example to show that there really is only one way to restore confidence in zombie banks: use receivership to wipe out the common and preferred shareholders, conserve the deposits and sell the good assets to new investors, and then restructure the remaining operations of the bank to maximize recovery to the bond holders and other creditors.

In other words, at some point the bondholders are going to have to take a big haircut.


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