Argentina in default for second time in 13 years

S&P declares Argentina to be in default for the second time in 13 years and the third in 25. Inflation is likely to hit 40% this year and the Peso has already lost a quarter of its value this year, measured against the US Dollar.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

Argentina teetering towards default

I’ve been working with a few insurers and reinsurers on credit risk recently. We’ve had plenty of reasons to think about it, what with new regulations (SAM, Basel III) and South African government downgrades. However, sometimes I get the impression that credit risk is viewed as an academic risk, as something that happens to others, micro lenders and maybe banks.

In South Africa, we’ve had incredibly few corporate bond defaults and most market participants don’t even know that the South African government “restructured” some of its debt in 1984 and so has, in fact, defaulted on contractual bond obligations.

In a recent credit risk and capital workshop, I raised the issue of Russia defaulting on Ruble-denominated debt in 1998, a big part of what led to the collapse of LTCM. Again, these events are often figured as “exceptionally unlikely” and not even worth holding capital.

Well, in the news, Argentina is about to default. Again. They have been one of the most regular defaulters on sovereign debt in the last couple of centuries. They’re also an example I often use of “currency pegs” doing precious little to mitigate currency risk except on a day to day basis.

More on that in another post (yes, I’m hoping to post a little more regularly in the coming months.)

KPMG Networking and Career Session

5 June 2014, Wanooka Partners Boardroom
Calling all university students who are studying actuarial science and graduating this year. Come and meet and greet and get to know the KPMG Actuarial Team, ask questions about the different career paths open to you.We look forward to hosting you


Date: Thursday 5th June
Time: 17:30 to 20:00 PM
Venue: WanookaPartners BoardroomKPMG Wanooka Building ,

Entrance on St Andrews Street


 Contact Stefan Strydom for more details and to register

KPMG Financial Risk Management

Mobile:  +27 (0)82 712 7768

Progress on tax free savings vehicles, but scathing words for life insurers

Read the latest (14 March 2014) document from National Treasury on tax free savings vehicles for South Africa. I think it’s a fantastic idea – both from a policy perspective with carefully designed incentives to promote long-term savings and from a personal perspective. I’m definitely going to use one for my own savings. However, one paragraph stuck out as a pretty clear message from National Treasury on their views of life insurers – and views on current product offerings rather than any historical sins:

Insurance products

Products must permit flexible contributions and may not bind individuals into any future contribution schedules. Many insurance investment policies would currently not match these criteria. Government is not open to providing a tax incentive for products that have high charges and may have an adverse impact on household welfare at the point at which the household is increasingly vulnerable. In this regard some savings products, for example endowment policies and any similar investments that include excessively high penalties in the case of early termination of the policy, pose a policy challenge from a market conduct perspective and will not be allowed in these accounts.
As discussed, National Treasury will engage with the FSB and industry in determining a reasonable approach to charges and early termination.


Wow. I know there are many bad insurance products around and probably some still being sold. I also know of many insurance executives who strive for value for money and are reinventing products and distribution channels to this end.
Seems to me NT isn’t yet on board.

Paris bans half all of all cars

Ok, only temporarily and the (almost) half that are banned change from day to day. A temporary increase in pollution levels has sparked the emergency measure.

I’m fortunate enough to live close to where I work with the wonderful MyCiti bus available as a genuine alternative to get to work. Imagine a world where I was paid (subsidised) not to use my car on particular days. Perhaps a combination of local government and employer-sponsored initiatives, with a scorecard and recognition or prizes or tiers of benefits for better green behaviour.

There’s so much more than can be done in this space and so much more that must be done in the coming years and decades. What would it take you to not drive your car to work?

Chinese debt a serious worry?

I’m not really that close to developments in the Chinese economy. It is a large, complicated beast that is quite different from our own. Over the last year or so I’ve heard more and more from people who generally speak sense that the debt levels in China and the awful investment projects used to show the appearance of a strongly growing economy form a worrying pair of forces.

House of Debt (a newish blog, seems interesting) has a post covering some of these risks to the Chinese and therefore global economy, with charts! I may post on these issues from time to time as it’s beginning to feel more and more relevant.

Binary vs “vanilla” bets and hedging

Nassim Taleb, an author who usually inspires (except in his second book, Black Swans) has co-authored a paper with a long-tailed title “On the Difference between Binary Prediction and True Exposure with Implications for Forecasting Tournaments and Decision Making Research”.

The paper isn’t paygated so check it out – it’s only 6 pages so definitely accessible. Don’t worry about the couple of typos in the paper, bizarre as it may be to find them in a paper that presumably was reviewed, the ideas are still good.

The key idea is that prediction markets usually focus on binary events. Will Person Y win the election? Will China invade Taiwan? These outcomes are relatively easy to predict and circumvent important challenges of extreme outcomes and Taleb’s Black Swans.

A quote from the paper, itself quoting Taleb’s book, Fooled By Randomness, sums up the problem of trying to live in. Binary world when the real world has a wide range of outcomes.

In Fooled by Randomness, the narrator is asked “do you predict that the market is going up or down?” “Up”, he said, with confidence. Then the questioner got angry when he discovered that the narrator was short the market, i.e., would benefit from the market going down. The trader had a difficulty conveying the idea that someone could hold the belief that the market had a higher probability of going up, but that, should it go down, it would go down a lot. So the rational response was to be short.

Drones, inequality and the end of the Age of the Gun

Here’s a mind-tickling quasi science fiction story about a future world of plenty derived from cheap autonomous robots. Well, plenty for some and medieval peasanthood for most.

I was having a discussion with a bright young colleague about the Venus Project, whether as a planet we have sufficient resources, capital and technology to meet all our needs. The conversation quickly flowed to income inequality, the increased value of scarce goods and the remaining challenges to lowering costs of production.

The linked article takes a different view – with the potential for massive military power controlled only through capital and technology without a need for tens of thousands of gun-toting supporters, the 1% could potentially achieve complete hegemony and control. With robots making more, better robots, guarding and controlling the other factors of production, what role is left for poor, especially robot-poor peasants?

It has probably been said before, but if feels to me that our generation may live through fundamental societal changes from autonomous robots, cars and drones.