Why an ESM programme could be a kiss of death
A couple of points on recovery values, via Voxeu.
Spain, needing a bailout for its banks, was granted a vague promise by EZ leaders for up to €100 billion. The details remain obscure, yet they matter enormously. This column argues that the so-called subordination effect of fresh official lending could put Spain on the slippery road to ruin. It argues that if sovereign bonds must be bought, this should be done in the secondary market which, would be pari passu with private investors and thus avoid the subordination trap.
‘Recovery value’ is a crude means used by some investors when evaluating sovereign default risk.
- The ‘recovery value’ calculation compares the size of the foreign debt (excluding equity, which is loss absorbing) of the country to its total foreign assets.
The difference between these two figures gives the amount the country would not be able to repay if it had to liquidate all its assets to pay of its foreign creditors (but not foreign equity holders).
- The ratio gives one the ‘recovery ratio’, i.e. how many cents on the euro foreign creditors could expect in this kind of situation.
Rough calculations of these ratios are listed in column (3) of table 1. These numbers provide thus the ratio of (gross) foreign debt to total (gross) foreign assets where (gross) foreign debt is defined as total (gross) foreign liabilities minus inward FDI and minus portfolio equity in the country.
Fulla article here.