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How the World is Defaulting on its debt | Akshat Shrivastava - YouTube
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hi everyone welcome to today's video so
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let me start today's video by telling
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you a very fascinating macro story about
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the world finances in the last seven
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years first graphic is for Greece and in
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2015 Greece became the first developed
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country in the world to default on its
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debt here is the second graphic for you
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it shows that countries like Lebanon and
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Argentina and a bunch of African
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countries defaulted on their debt in
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2020. here's the third graphic which
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shows that Sri Lanka and Russia very
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recently defaulted on their date now if
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you look around almost half the world is
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defaulting on its debt the world is
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hitting its all-time high number when it
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comes to debt so what is precisely
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happening in the world is it a
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Troublesome situation is it going to
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impact you as an investor this becomes
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extremely important point for you to
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understand the summary of the video is
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that the way things are moving it does
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not look very promising you as an
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investor need to start taking some steps
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what steps I will talk about it in the
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video so please watch it please share it
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with your friends this is a very
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important video so let me tell the story
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in seven simple points that will help
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you understand this complex Topic in a
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very easy to understand intuitive manner
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also a very big shout out to our
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sponsors for today it is cuckoo FM It's
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a Wonderful audio knowledge platform
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where you can listen to audiobooks where
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you can listen to different knowledge
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oriented shows and enhance your
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knowledge I would highly recommend you
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that you listen to a book called as the
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changing world order by Mr radar Leo he
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has covered some of the points that I'm
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going to talk about today in his book so
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it's a wonderful book I'm linking it in
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the description box you can go and check
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it out so first and foremost you need to
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have a quick understanding about the
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type of debts that exist in the world
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now there are thousands of different
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types of debt but three very important
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ones are one is called as household debt
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one is called as corporate debt and one
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is called as sovereign debt so let me
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give you a very quick explainer there so
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household it very easy to understand it
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means that for example when people like
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you and me we go and borrow money in
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terms of buying a motorcycle or a fridge
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or a house or a car that is a household
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debt that is what it means as
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essentially we go to a bank we say that
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hey van please give me one crore rupee I
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want to invest in an asset which does
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not grow and I would love to give you my
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Emi so we keep on giving bank that Emi
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this is just a joke please don't take it
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seriously but the bottom line is that I
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hope you get the concept of what
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household debt is now in case we are
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unable to pay that Emi on a house or Emi
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on a bike then the bank people come they
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will give you some phone calls they
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might threaten you first and foremost if
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you still don't pay they will come and
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take your bike away or come and
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foreclose your house this is the
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recourse measure that is there on
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household date the second key thing is
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Corporate debt now for example companies
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like ITC or Bajaj Finance or Bajaj
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finser or HDFC they sometimes release
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corporate bonds now corporate bonds
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simply what it does is that instead of
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selling equity in the stock market
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because that will lead to loss of
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outstanding shares for the company
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company goes and raises it and that is
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called as corporated so you as an
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investor can also invest in corporate
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debt through Bond investing Platforms in
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India now in case the company defaults
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or if the company goes bankrupt so a lot
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of companies in India go bankrupt every
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year so in that case what happens is
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that this company or that corporate is
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liquidated liquided it simply means that
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for example hypothetically speaking if
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ITC goes bankrupt then Regulators will
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sell off the factories buses all those
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different things that ITC owns they will
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get a pool of money and they will first
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return it to bondholders so this is the
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liquidation process and the recourse
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mechanism when it comes to corporate it
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the third type of debt is called as
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sovereign debt sovereign debt simply
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means that if so if India is taking a
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loan if China is taking a loan if U.S is
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taking a loan at a national level and
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that is called as a sovereign debt now
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who gives this debt so for example it
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can happen that India takes loan from
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International organizations like IMF
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World Bank that's one option of taking
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sovereign debt other option would be
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that India can take debt locally also by
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issuing bonds for its own citizens so
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you and I can pay and buy those bonds
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and government is taking debt from us
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third option could be that India can
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take loan from China India can take loan
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from us and vice versa so these are some
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of the options that exist now a very
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important question that you might ask me
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is that okay what happens if a sovereign
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country defaults on its debt for example
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if India takes on a lot of debt and if
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it defaults what would happen then so
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this brings us to point number two and I
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will show you this particular chart for
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Argentina when it defaulted on its debt
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so if you check this chart this blue
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chart shows the interest rate or yield
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of bonds in Argentina now what happens
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is that every time the country defaults
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this spikes up for example when IMF
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bailed out Argentina here it led to a
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spike in the interest rate for the
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Argentinian economy now what does this
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exactly mean spike in interest rate it
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simply means that the cost of borrowing
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for Argentina it goes up for example
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think about it this way that you take a
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loan from HDFC bank and you are unable
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to pay it and then bank has to come and
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foreclose your house or foreclose your
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bike and that matter is settled the
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second time you go and try to take a
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loan from ICICI Bank will you get a
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worse interest rate for you the answer
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is absolutely yes why because you have
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already defaulted on a loan think about
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it also from a funny example that Vijay
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mallya took loan once he ran away to UK
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now and now for some weird reason he
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comes back to India starts his business
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again and start taking loan more will he
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get the same lucrative deal I really
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hope that the answer would be most
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likely you know I cannot guarantee it
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but the common sense tells us that Vijay
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mallya will have a very hard time
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getting a loan at the same deal the same
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applies at a national level that if a
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country defaults on its state its cost
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of borrowing indicated by its 10-year
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bond yield it goes up in prices so it
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becomes harder and harder for a country
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to borrow more funds now has the cost of
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borrowing in India gone up the answer is
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yes it has gone up in 1991 India came
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very close to defaulting on its loan so
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it's not just about defaulting it's also
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about coming close to defaulting then
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also the bond yields get spiked up and
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this is the bond yield for Indian bonds
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as of now pair this to U.S 10-year
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treasury bonds you can see that U.S
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borrows somewhere between two to three
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percent and India is borrowing roughly
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between seven to eight percent and even
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if you adjust for a long term inflation
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it is very clear that the cost of
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capital in a country like India is
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higher or much higher compared to that
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in the US why is that the case because
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the world believes that U.S is slightly
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more stable economy compared to India
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and the chances of default in the US is
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much lower compared to that in India so
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every time emerging economies default or
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come closer to defaulting on their loan
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their interest rate spikes or their bond
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yield spikes so this becomes the first
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problem in terms of defaulting on your
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loan the second key problem that happens
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when a sovereign defaults on their loan
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is the loss of sovereignty now a lot of
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countries in Asia Pacific and developing
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parts of the world they have started to
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take more and more loans from China and
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this trend has continued from roughly
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2000 onwards when China was amping up
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its economic gain so countries like Sri
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Lanka countries like Afghanistan
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countries like Nepal they all took like
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massive amount of loans from China now
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what is happening is that countries like
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Pakistan Sri Lanka and Nepal they are
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going bankrupt in fact Sri Lanka has
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defaulted on its loan now China has
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already given a lot of loans to Sri
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Lanka now Sri Lanka will go to China and
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say that you know what China please
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forgive my loan or give me like some
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better deal I can't pay my loan what
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should I be doing then China I mean
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China will say that you know what you
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also start eating back no they will not
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say that basically what they will see is
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that you know what whatever
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infrastructure for which we have given
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you loans now we control it for example
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in Sri Lanka there is a port called
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here's a graphic for you it was built
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with China's help and China now exerts a
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lot of influence and control over it
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because Sri Lanka is unable to pay its
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debt so whenever a sovereign a country
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defaults on its loans two things happen
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one is the cost of borrowing for that
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country goes up massively and the second
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is that in some instances especially
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when you are taking loans from countries
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like China they can exert a lot of
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influence on you and they can and they
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can de facto control your economy now
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comes the third question that why is it
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that Sovereign countries take loans
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a lot about living frugally so can't
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listen to akshat No they will not listen
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to akshar but the important point or
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important message here is this that
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countries take on loan because of a
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mathematical equation and the
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mathematical equation is this that in
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majority of the countries the expenses
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are much greater than the income that
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the country makes that's first part of
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the equation and in every country they
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want vikas right they want because we
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want development we want because people
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keep on yearning about because that
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vikas is not happening roads are not
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getting bit when will vikas come when
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will vikas come so the government gets
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fed up with this nagging and they end up
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borrowing money even from horrible Money
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shark lenders like China now the thought
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process here is fairly simple that if we
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take money on debt and if we undertake
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development it will lead to more
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productivity more for example more
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highways more roads will get built so
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more Transportation will take place more
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business outcome will happen and as a
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result because of the increased and
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improved GDP we will be able to pay off
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debt but what happens in this entire
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game we miss out on analyzing the
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caliber of corrupt politicians they are
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very crafty they are very Sly in terms
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of whatever they do so they are able to
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siphon off ton of money or they will
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just take money in debt they will do
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like freebie economy okay let's
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distribute like laptops let's distribute
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like lanterns nowadays people are making
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YouTube videos so how about we
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distribute like some iPhones so all this
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crazy stuff keeps on happening and this
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entire Spectrum does not play out so as
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a result a lot of sovereign countries
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get into debt trucks now let me talk
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about Point number four which is about
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the two recent case says one is Sri
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Lanka defaulting on its debt and Russia
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defaulting on its debt now in addition
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to corrupt politics there are
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macroeconomic factors at play which have
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led these countries to default on its
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debt so let us very quickly understand
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that
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now in case of Sri Lanka they have
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defaulted on their debts for a series of
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reasons I have covered it on this video
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here you can watch it to get a complete
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understanding but the synopsis of this
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is that the commodity prices across the
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globe are rising Sri Lanka is a very
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closed community so it only exports
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certain types of raw material their
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Imports have been really bad they are
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hardly earning any money there is
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corrupt politics that is going on their
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GDP is falling and a bunch of bad bad
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stuff is happening now the macroeconomic
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factor at play was at the commodity
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prices all across the globe have been
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rising from the covet times so there was
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a poet shock there was 2021 Russia
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Ukraine crisis shock so both these
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sharks have skyrocketed the commodity
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prices you can take a look at this
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particular chart here so as a result a
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destabilized economy like Sri Lanka was
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not able to suffer the spike in
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commodity prices and its economy has
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finally defaulted an analogous example
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here would be that if you're a very lazy
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student right you have your class 10th
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board exam coming up you don't study you
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play pubg all day now there is one month
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left through the exam you felt ill so
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you could not even study kunji and
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guides and keys and you could not pass
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the exam so same situation is happening
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with Sri Lanka that Sri Lanka for a
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decade now was playing pubg with its
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economy it was not doing anything it was
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not expanding upon its tourism it was
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not expanding upon its Commodities that
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it could export its politics was in
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Chambers then macroeconomic crisis also
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came and Sri Lanka ended up scoring 10
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out of 100 marks in maths so that is
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what has happened with Sri Lanka now
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what is the case with Russia because you
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will see Russian President Vladimir
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Putin sitting on a horse shirtless so he
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comes like a macho man so why is he
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unable to save the economy in Russia and
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why has Russia defaulted it is because
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of sanctions so Russia to start off with
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it's a very close economy it has a lot
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of Natural Resources you can export
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those natural resources and make money
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in the process but because of Russia
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Ukraine war there were a ton of
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sanctions that were imposed on Russia so
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it was not able to get US dollars to pay
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off its debt because it has to pay off
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its debt in US dollars so as a result
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Russia defaulted but in Russia's case
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and these strength of Russia's economy
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is much more powerful compared to
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something like Sri Lanka or Pakistan so
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I hope this reason is clear that for
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what reason these sovereigns default on
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their date now comes the fifth point
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that are there other countries at free
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which are likely to default the answer
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is unfortunately a big yes here so
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countries like Pakistan Nepal
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Afghanistan they are all on verge of
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bankruptcy here is a chart for you which
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shows that a bunch of African nations
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are likely to default as well and that
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will wreak havoc on the African economy
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as well as an interesting point I would
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not be surprised if almost 50 percent of
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countries in the world end up defaulting
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in the next 10 years why is that the
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case because the world debt is very very
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high to begin with as of now and
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majority of this debt is denominated in
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U.S dollars So U.S dollar is going to
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take a hit because of that and many of
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these same countries will go to China
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sell off a part of their sovereignty in
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order to refinance that debt so that is
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the entire spectrum of things that is
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happening do countries want to do that
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the answer is no but unfortunately these
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countries are left in with very little
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options now you will say that okay I am
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sitting in India why do I care I will go
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to Goa enjoy sun-kissed beaches and put
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a can do swimming what not so how does
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it impact me it actually impacts you a
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lot because the single biggest reason
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for India to grow from 1991 to 2020 was
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the fact that world was relatively
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peaceful yes there were series of
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incidents that happened between this
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time frame but relatively speaking the
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world was in a peaceful State and India
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liberalized so there were LPG reforms
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let me know what LPG means I have taught
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about it earlier on some of my videos so
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India undertook LPG reforms in 1991 and
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we enjoyed the benefits of it till 2020.
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so my thinking or my hypothesis is that
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for India to grow the world has to grow
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too India cannot grow in isolation so
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all these different crises do impact us
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quite a lot India is not an isolated
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economy something like Russia we do
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depend a lot on World Trade we do depend
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a lot on U.S economy we do depend a lot
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on the European economy so as Indians we
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should pray that so all the countries
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that are being burdened by this mountain
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of debt they just figure out a way to
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get over it so now comes the sixth point
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that what is it precisely that the world
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needs to do in order to overcome this
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debt so go back to that same
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mathematical equation and you need to
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reverse it so first and foremost your
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Revenue should be greater than your
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expenses so we need to be frugal in
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terms of how the world is spending money
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very very sensibly we should spend it
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second is that people should not go
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crazy about vikas that we want vikas we
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want vikas in the morning we want vikas
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in the afternoon we want because at
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night no please don't do that sensible
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because or sensible growth if it happens
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in the world it is good enough please
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don't run after growth so it's like me
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trying to advise people to be moderate
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so this thing does not work in a
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consumeristic world so unfortunately I
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don't think that this will work out but
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this is the simple road map that Revenue
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should be greater than the expense and
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people should be sensible when it comes
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to development this brings us to the
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final point that if you are an investor
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what are some of the key things that you
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should keep in mind and where is the
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world going with the hijack it so first
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and foremost my advice to you as an
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investor would be that please be a
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diversified or a highly Diversified
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investor I have said it over and over
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and over and over again please be
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Diversified this is super important
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please be Diversified across different
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asset classes we I will not name one
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asset class which starts with c and ends
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with o you can let me know in the
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comment what does that mean but the
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point being that you need to diversify
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within different type of companies that
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you are purchasing that's point one
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point number two please do not buy high
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debt businesses this is critical please
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do not invest in businesses that are
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very high debt oriented you are likely
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to lose a lot of money because these
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days 5 10 15 20 correction can happen
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anytime number three is the Bull Run
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intact the answer is very much yes it is
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still intact because I feel that there
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is a lot of steam left to what central
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governments can take actions around this
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and they will deploy all macro tools
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that they might have on their hand and
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if it leads to genuine growth at some
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stage that might save us from this high
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debt situation duration so to speak is
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it likely to happen my guess is as good
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as yours very difficult to predict
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fourth and final point that you need to
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keep in mind is that you need to be
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geographically Diversified now please
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don't keep all your money in emerging
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economies you need to take possessions
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outside India also because in high risk
[958]
High rate environment emerging economies
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even for their no fault of their own
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they end up taking the most hit I hope
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you enjoyed the video please press the
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like button and share it with your
[967]
friends and I will see you the next time
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