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The Dominoes Keep Falling: Leftward Lurches And EM Defaults

Sometimes one big event dominates the landscape, like last week when the Fed raised interest rates. Other times a bunch of less-universally-significant-things add up to a meaningful story. And the story that follows here is, of course (given the venue), ominous.

First up is the much-discussed US$9 trillion that developing countries borrowed back when the dollar was weak and their currencies were relatively strong. Pundits have been warning that with the dollar soaring this debt was largely underwater and therefore a threat. But as far as anyone could tell it wasn't blowing anything up.

Then on Friday a big Mexican construction company defaulted:

CA Skips Debt Payment as $1.35 Billion Bond Default Looms

(Bloomberg) - Empresas ICA SAB will skip a debt payment due by the end of the month as Mexico's biggest construction company heads for the nation's biggest default in at least two decades. Stocks and bonds declined.

The builder won't pay $31 million in interest on its $700 million in bonds maturing in 2024, the company said Friday in a statement. ICA was using a 30-day grace period that ends Dec. 29. The company will be forced to halt payments on all of its $1.35 billion in overseas notes, eclipsing glassmaker Vitro SAB as the biggest corporate bond defaulter in Mexico since Moody's Investors Service began tracking the data in 1995, according to the rating company.

The announcement caps a year in which ICA posted its biggest quarterly loss in 14 years as the government cut back infrastructure projects and the plunge in Mexico's peso drove up the company's leverage. The company will work on a cost-cutting and restructuring plan to be completed by mid-February, advised by Rothschild & Co. and FTI Consulting. ICA appointed board member Alfonso Gonzalez Migoya as co-chief executive officer.

ICA had coupon payments looming over the next two months for its two other dollar bonds maturing in 2017 and 2021, with the first one due Jan. 24. The company reported total debt of 57.9 billion pesos as of September 30.

Now multiply the above by, oh, a thousand, and you get a sense of what could happen in 2016 if the dollar stays strong, commodity prices stay low, and the other big dollar borrowers start toppling.

Next, we got to see how a formerly-well-run country responds to a financial crisis brought about by overspending and rampant corruption: It replaces its rock-solid, fiscally responsible finance minister with a political operative more open to spending whatever it takes to keep the incumbents in power.

Brazil's New Finance Minister Faces a Big Test After Friday's Rout

(Bloomberg) - Nelson Barbosa could, of course, turn out to be the man who fixes Brazil's finances, tames soaring inflation and revives the sinking economy, but investors sure aren't betting on it.

As word spread across Sao Paulo trading floors Friday that Barbosa would be the country's next finance minister, replacing the beleaguered Joaquim Levy, markets plunged. By day's end, the currency was down 2.6 percent, stocks 3 percent.

That harsh reception is the exact opposite of the broad rally that greeted Levy when he took the post a year earlier. Levy, though, was the market's golden boy, with his University of Chicago-training, asset-manager experience and reputation as a fierce budget cutter. Barbosa, while generally respected by analysts for his technocratic skills, isn't seen as being quite as tight-fisted on spending, a perception he only reinforced when suggesting Friday that he was amenable to granting subsidies to some industries.

What's more, the crisis that Barbosa will step into when he's officially sworn in Monday is markedly more severe than it was a year ago. The economy is now shrinking at a 7 percent annual pace; the budget deficit has swelled to the widest in at least two decades; the country's investment-grade rating is gone; Congress is bogged down in impeachment proceedings against President Dilma Rousseff; and the greatest corruption scandal the country has ever known is showing little sign of abating. If Levy couldn't stem the crisis when it was more manageable before, what reason is there to believe Barbosa will now?

Brazil -- once viewed as the Latin American country that got it right -- had a strong currency, steady growth and a more-or-less balanced budget for much of the past decade. But it eventually fell back into the old pattern of over-spending, over-borrowing and divvying up taxpayer wealth among ruling elites. Now it's at a crossroads, with one branch leading to more debt and eventual dissolution, and the other leading to short-term pain but a chance at long-term sustainability. In other words, Brazil is pretty much where the US, Europe and Japan are. And based on the above personnel decision, it's decided to follow the developed world down the path to financial oblivion.

And last but not least, Spain has joined the lengthening list of European countries where anti-euro parties are taking power:

Spanish election: PM Rajoy's party loses majority

(BBC) - Spain's governing conservative party has won the most seats in the general election but has lost its majority and must now try to form a coalition.

With almost all votes counted, the Popular Party (PP) had 123 seats; the Socialists 90 and the anti-austerity Podemos party 69. The liberal Ciudadanos party was in fourth place with 40 seats.

A spokesman for Podemos said the results showed that two-party politics in Spain had ended. "We are entering a new era in our country," said Inigo Errejon.

Prime Minister Mariano Rajoy's PP needed 176 seats to form a majority. It had 186 seats in the outgoing parliament. Analysts said the PP could find it very difficult to form a government because it can't achieve a majority in parliament in coalition with Ciudadanos, its most natural partner. The Socialists, on the other hand, could form a pact with Podemos and Ciudadanos.

As in much of the rest of Europe, Spanish voters have decided that the status quo isn't working so they're considering alternatives. Here, it's mainly Podemos, a left-wing, anti-austerity party along the lines of Syriza in Greece and the far-left party (which includes local communists) that just took power in Portugal. Should Podemos and the socialists form a coalition it would likely oppose more cuts in government spending and insist on higher deficits and more debt, setting up yet another conflict with Germany.

So what story do these three events combine to tell? Too much debt makes a country ungovernable, leading to political chaos which in turn leads to even more debt, and so on until a crisis interrupts the cycle. And where in the past this kind of thing was usually an isolated occurrence, today it's the global new normal. We're all functionally broke and, therefore, in various stages of an epic crash-and-burn. Stuff like the above will soon be everywhere.


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