sexta-feira, setembro 02, 2011

Debt Workout 101 – games borrowers and lenders play

Debt Workout 101 - part 1 

Here are some Sovereign/External Debt Workout Strategies for 
imprudent overleveraged irresponsible borrowers and 
their imprudent  overextended irresponsible lenders.
  1. First rule of debt workout:  If you owe the bank 1.000€  and you can’t pay, you have a problem. If you owe 1.000.000€ and you can’t pay, the bank has a problem (add zeros as appropriate). 
  2. Bigger fool gambit:  Creditors increase pricing, reduce tenors and refuse to refinance, increase demands for repayment as the borrower turn to other creditors or third-party guarantors, usually related (a rich uncle) or official creditors (Central Banks).  Last creditor out is a rotten egg.
  3. Asset grab:  Creditors demand reinforcement of third party guarantees or collateral.  Possession is nine-tenths of the law, but Watch out for invalid preferential transfers in the last few months before bankruptcy. 
  4. Small creditor gambit: Smaller creditors hold out for  favourable treatment so that they don’t have to share in the creditor side sacrifices
  5. All-in-this together gambit: Rapidly escalate local (borrower-side) problem into a systemic (creditor-side)  problem, in order to get a favourable resolution from policymakers (or third-party guarantors), such as taxpayer bailout for the borrower and/or the creditors.  This is a more transparent version of the “bigger-fool-gambit”. 
  6. Game of chicken: Borrowers pay late, threatenning to default, in order to overcome the creditors reluctance to modify  loans conditions or to sell  the loan assets at discount. 
  7. Bottom fishing:  Speculative debt traders buy distressed debt at deep discount and present it for payment at maturity, to the borrower, or better yet, to the related party, wealty shareholder or guarantor (as in the Bigger-fool-gambit). 
  8. My Dad  is stronger than yours:  Bringing third and fourth parties to the debt renegotiation table, preferably heavy-duty entities like a major Shareholder or Stakeholder or even the Constitutional Courts, etc, in order to skew the loss-sharing in favour of either the imprudent borrower or the imprudent lender and their respective shareholdr / taxpayer.       A slightly different version of this is "my streets are rowdier than yours".  In either case, inflexibility and other uncooperative behaviour pays. 
  9. Don't look under the carpet, where all the hidden liabilites have been stashed...
Mariana Abrantes de Sousa
PPP Lusofonia

See also
Foreign claims or Portugal, Greece...
Portugal e Grécia apanhados no jogo do empurra 
Trade midgets can't guarantee intra-Eurozone CAB adjustments
SOE/SEE debt coming home to roost 
Bill Rohdes,  book on sovereign debt restructuring 
Mariana Abrantes de Sousa, A gestão de risco de crédito com principal factor de sucesso bancário, Revista da Banca, Setembro 1992
Bank risk management,
S Ping Ho, Game theory and PPP renegotiation