by Calculated Risk on 7/10/2010 08:30:00 AM

CR Note: This is part 2 in a series on sovereign debt issues by reader "some investor guy". Here is Part 1: How Large is the Outstanding Value of Sovereign Bonds?

Sovereign bonds have been defaulting for almost as long as there have been sovereign bonds. The problems go back many centuries. A good overview created for the IMF is “The Costs of Sovereign Default” by Eduardo Borensztein and Ugo Panizza. Some countries are “serial defaulters”, with a long history of sovereign defaults. Many have defaulted on sovereign debt five times or more.

Click on graph for larger image in new window.

Here is a chart showing the number of countries defaulting each year from 1824 to 2003. The raw data comes from S&P. Charts were created by the Some Investor Guy.

As you can see, there are some years with no defaults at all, and other years with many. Defaults tend to come in clusters, and the behavior of lenders often changes substantially after defaults. In the Volatility Machine, Michael Pettis asserts that sovereign default contagion follows predictable patterns, and that contagion is primarily due to investors in the first defaulting country also having investments in other countries which are vulnerable. This is especially the case with leveraged investors.

In the seemingly “quiet period” from 1945 to 1959, there was just one sovereign default. Interestingly, this was also a time with a number of very angry foreign investors. This time period was the peak of expropriation of foreign assets. There were at least 25 nationalizations and expropriations of foreign assets. Many were by new members of the Soviet Bloc, and by newly independent colonies (Source: Michael Tomz, Stanford, working paper).

For you ubernerds who want to see which countries defaulted each year, here they are. I’ve broken them down into three periods to make the charts more readable.

1820 to 1920(click on chart for larger image)

1920 to 1980

1981 to 2003

The underlying causes of default (such as rises in interest rates, wars, commodity price collapses, and simply borrowing too much money) have been diagnosed for many episodes. Proximate to the default, any of the following six financial changes might occur:

1. Government revenues fall far below history or forecast;
2. Expenses aside from debt service rise far above history or forecast;
3. Interest rates rise substantially; due to inflation, credit spreads, illiquidity, or other causes
4. Demand for bonds suddenly drops or disappears (a sudden stop);
5. Exchange rates move, making payments on foreign denominated bonds much more expensive (currency risk), and,
6. A government simply decides not to pay, even though it has the capacity to pay (repudiation).

Paolo Manasse and Nouriel Roubini studied sovereign default risk and concluded that many guidelines used for estimating when default was likely did not perform well, primarily because those guidelines looked at separate risks. For example, total government debt exceeding 200% of GDP is often used to indicate stress. However, some other circumstances may make the problems much less severe (like having a growing economy and no foreign denominated debt). Other factors might make it much worse (like high inflation).

CR Note: This is from "Some investor guy". Over the next week or so, some investor guy will address several questions: What are market estimates of the probabilities of default? What are total estimated losses on sovereign bonds due to default? What happens if things go really badly and what are the indirect effects of default?

Next in the series, Part 3. What are the Market Estimates of the Probabilities of Default?

Series:
• Part 1: How Large is the Outstanding Value of Sovereign Bonds?

• Part 2. How Often Have Sovereign Countries Defaulted in the Past?

• Part 2B: More on Historic Sovereign Default Research

• Part 3. What are the Market Estimates of the Probabilities of Default?

• Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

• Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

• Part 5B. Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange

• Part 5C. Some Policy Options, Good and Bad

• Part 5D. European Banks, What if Things Go Really Badly?

by Calculated Risk on 7/09/2010 10:18:00 PM

Note: this is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for July 9, 2010.

Changes and comments from surferdude808:

Relatively quiet week for the Unofficial Problem Bank List.

The four failures -- Home National Bank ($644. million), Bay National Bank ($282 million), USA Bank ($193 million), and Ideal Federal Savings Bank ($6.3 million) were removed.

There are two additions including Great Northern Bank, Saint Michael, MN ($70.8 million); and American Eagle Savings Bank, Boothwyn, PA ($21.9 million).

These changes leave the Unofficial Problem Bank List with 796 institutions with aggregate assets of $411.6 billion. Next week, we anticipate the OCC will release its actions for June 2010.

CR Note: The list will probably be over 800 next week, and is still on pace to hit 1,000 by the end of the year.

by Calculated Risk on 7/09/2010 07:11:00 PM

New Century Bank?
Customer First / U.S.A.?
Who's in control here?

Home, Bank on the range
Where Bair, and the banksters play....
Cloudy sky ahead.
by Soylent Green is People
From the FDIC: New Century Bank, Phoenixville, Pennsylvania, Assumes All of the Deposits of USA Bank, Port Chester, New York

As of March 31, 2010, USA Bank had approximately $193.3 million in total assets and $189.9 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $61.7 million. Compared to other alternatives, ... USA Bank is the 89th FDIC-insured institution to fail in the nation this year, and the third in New York. The last FDIC-insured institution closed in the state was The Park Avenue Bank, New York, on March 12, 2010.

From the FDIC: RCB Bank, Claremore, Oklahoma, Assumes All of the Deposits of Home National Bank, Blackwell, Oklahoma

As of March 31, 2010, Home National Bank had approximately $644.5 million in total assets and $560.7 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $78.7 million. ... Home National Bank is the 90th FDIC-insured institution to fail in the nation this year, and the first in Oklahoma. The last FDIC-insured institution closed in the state was First State Bank of Altus, Altus, on July 31, 2009.

by Calculated Risk on 7/09/2010 05:10:00 PM

Bay National... zip
Ideal Federal... whoosh
A trifecta miss : - (
by Soylent Green is People
From the FDIC: FDIC Approves the Payout of the Insured Deposits of Ideal Federal Savings Bank, Baltimore, Maryland

As of March 31, 2010, Ideal Federal Savings Bank had approximately $6.3 million in total assets and $5.8 million in total deposits.
...
he cost to the FDIC's Deposit Insurance Fund is estimated to be $2.1 million. Ideal Federal Savings Bank is the 88th FDIC-insured institution to fail in the nation this year, and the third in Maryland. The last FDIC-insured institution closed in the state was Bay National Bank, Baltimore, earlier today.

Pretty small. Not ideal.

by Calculated Risk on 7/09/2010 04:36:00 PM

From the FDIC: Bay Bank, FSB, Lutherville, Maryland, Assumes all of the Deposits of Bay National Bank, Baltimore, Maryland

As of March 31, 2010, Bay National Bank had approximately $282.2 million in total assets and $276.1 million in total deposits.
...
The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $17.4 million. .. Bay National Bank is the 87th FDIC-insured institution to fail in the nation this year, and the second in Maryland. The last FDIC-insured institution closed in the state was Waterfield Bank, Germantown, on March 5, 2010.

A quick start ...