Question

5. A) What is the unique aspect of restructuring sovereign debt?

B) What are market investors implicitly saying when they recently bought Warren Buffett’s company, Bershire Hathway, 2 year bonds at lower interest rates (yields) than the recently auctioned 2 year Treasury notes?

Answer 1

a) The unique aspect of restructuring sovereign debt is degerming that a country has become insolvent because a country can never be insolvent, technically to pay back the debt it can simply print more currencies and pay back the debt and then the issue arises of inflation, current account deficit and other things but technically the country can not be insolvent. One issue what if the debt has to be repaid in the other currency, it can not print that currency but it can print its own currency and then convert it into the market and then pay it so determining that a sovereign nation is insolvent is difficult although many countries have defaulted in the past.

b) The Berkshire Hathway raised money by issuing bond and it was able to do at a rate below the similar T-notes. If we look at it from the safety points of view investors are considering the Berkshire bond’s to be of more higher quality than treasury bills but this can also be a result of stable performance of the company and the rising debt to GDP ratio of the US government has raised concern as to how much excess debt can US have in percentage terms of its GDP.