A close parallel to this situation was the state of Third World debt in the mid-1980s. Mexico’s announcement that it could not meet its foreign debt service was the shock that brought ugly financial reality into conflict with the assumption that somehow any government debt could be paid – even debts denominated in a foreign currency.
The international financial system was rescued by the issue of Brady bonds – “good” new bonds for old “bad” ones. The capital value of these bonds was still far below the original debt, but they had the virtue of setting realistic levels by bringing the debt balance more in line with the actual ability of debtor countries to earn the dollars or other hard currencies needed to service these bonds.
The current crisis requires a similar wrote-down and recognition that fictitious price levels must give way to reality at some point. In fact, we have reached the end of an illusion – the illusion that bond (and stock) prices could be sustained indefinitely simply by financial engineering, without an economic base capable of producing enough surplus revenue to justify existing bond and stock prices....Naked Capitalism
Michael Hudson: A Brady Bond Solution for America’s Unpayable Corporate Debt
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University
We have rules about banks' debt / equity ratios (not nearly strict enough in my view). Exactly the same should apply to non-bank corporations because the effect of a mass failure by non-banks to pay their debts would be just as catastrophic as banks doing the same.
ReplyDelete