As I have mentioned many times before, Philippa Malmgren is an insider's insider. She was Special Assistant to the President for Economic Policy on the National Economic Council. She was also a member of the President's Working Group on Financial Markets, aka, the Plunge Protection Team. Her client list includes every elite corporate firm in the world (Take a minute to look at the list, its mind boggling, the list is here.). You don't get much more insider than this.
When she speaks, it makes sense to pay attention. Most recently she spoke at the the Irish Funds Industry Association’s 2012 Annual Global Funds Conference. International Adviser reports on what she said:
The vast majority of debt in today’s world will be defaulted on, according to Philippa Malmgren, president and founder of London based Principalis Asset Management.
Speaking at the Irish Funds Industry Association’s 2012 Annual Global Funds Conference 2012 in Dublin yesterday, Malmgren, who, among many other roles, has served as a financial markets adviser in the White House, explained that there were a number of ways in which governments are likely to default over the next decade.
“When I look around the world, the magnitude of the debt problem is so great that the vast majority of the debt will be defaulted upon,” said Malmgren, who reiterated this point for emphasis.
“What is important is to understand that there are many ways in which you can default.”
Malmgren explained that there are in fact five likely ways for a government to default on its debt.
“Number one, the state can just wake up and tell you they are never going to pay you back. That is called an Argentine style default – we haven’t really seen that and I don’t think we’re going to.
“The second one we have definitely seen and it is when the state wakes up and says, you know we cannot we meet the promises made, we cannot meet the obligations – yes we are going to pay you back but a little bit less – that is called a haircut and that is what we have seen in Greece. Usually when they do it once, you know you are going to get it multiple times.”
The doctor, who also interestingly has a certificate from the 101st Airborne Division’ Air Assault School, said the third option is austerity – something which has been witnessed already in many corners of the globe, although she adds that there is “a human limit to how much austerity people can withstand”.
The penultimate defalt option offered by Malmgren is inflation – something she notes is often denied by governments right up until its undeniable existence. The last option is devaluation, an option many governments would like to have, but one unattainable when investors are fleeing problems elsewhere.
Laying down the gauntlet for the watching fund industry, Malmgren added: “A principle focus for the asset management industry over the next decade is going to be ‘arbitraging’ the mixture of defalts because there will be different governmnt choices in different parts of the world.”