The debt contraction finds the foreign debtors carrying almost $10 trillion in dollar-denominated debt, which means they’re short the dollar. The dollar’s 18 percent rise since June of last year is inflicting a lot of pain. From Wolf Richter at wolf street.com:
One of the craziest financial creations on earth, available only near the peak of enormous credit bubbles when nothing can ever go wrong, became available this spring: 100-year bonds issued by governments or companies in emerging countries, in currencies they don’t control.
Yield hungry investors in developed markets who purposefully had been driven to near-insanity and drunken benightedness by the zero-interest-rate policies of central banks around the globe jumped on them. For them, it was the way to nirvana.
At the peak of Draghi’s QE hype in April, Mexico, which has a long history of debt crises, was able to sell €1.5 billion of 100-year bonds denominated in euros because yields were even lower in the Eurozone and bond fund managers there even more desperate and insane; at a ludicrously low yield to maturity of 4.2%.
Even more inexplicable was just how Petrobras, Brazil state-controlled oil company, was able to bamboozle investors on June 2 into buying its 100-year dollar-denominated bonds.
At the time, the company had just ended a five-month delay in releasing its financial statements. It’s tangled up in a horrendous corruption scandal that has reached the highest echelons of political power. It’s backed by the Brazilian government whose credit rating, as everyone had been expecting for months, was cut to junk last week by Standard and Poor’s. To top it off, Brazil has been facing a deep recession and a plunging currency, which makes paying off dollar-denominated debt prohibitively expensive.
And it renders that debt toxic.
Petrobras, whose credit rating was cut to junk the day after Brazil’s – though Moody’s had cut it to junk seven months ago – faces other, even bigger problems: over $130 billion in debt, the most of any oil company, and the terrific collapse in oil prices.
OK, in the second quarter, oil rallied sharply, and some bond-fund folks might have thought that the oil bust was over though the entire world was still practically swimming in oil. And amidst this buoyant mood about Petrobras’ prospects, the company was able to sell $2.5 billion of 100-year dollar-denominated 6.85% bonds to fund managers in the US and elsewhere who were blinded by their own optimism and driven to insanity by years of zero-interest-rate policies.
Now, three months later, these “century bonds” have gone to heck.
The three largest holders of these bonds are Pacific Investment Management, Fidelity, and Capital Group, according to Bloomberg. After Petrobras’ credit rating was cut last week, the bonds traded at 69.5 cents on the dollar.
That’s a big loss for these geniuses, or rather for their clients, in just three months.
To continue reading: World Is Now “More Exposed than Ever” to Dollar