Irresponsible Borrowing

The world is awash in irresponsible borrowing.  Governments, companies and individuals borrow money without a clear path to repayment.  In addition, governments and companies commit to long-term obligations, primarily in the areas of retirement and health care, without appropriate funding.  Unfunded liabilities are, for all practical purposes, debt.

This tendency has been exacerbated by unusually low borrowing costs and investors searching for historic yields without adequately investigating long term credit worthiness.

For example, Argentina, a long standing serial defaulter, has finally negotiated a settlement relating to a previous, defaulted bond issue.  By finally agreeing to pay approximately $5.0 billion to a group of investors, the country will again have access to international credit markets.  Does anyone think that they won’t be back in the market with a substantial tranche of new debt, and, that they will find willing lenders?

Irresponsible lending is likely to continue until the financial markets develop a taste for responsible lending.  This does not seem to be likely, particularly in an era when investors are seeking returns that are not realistic in the current low interest rate environment.

Individual investors and lenders are not going to be able to change the world.  As long as virtually risk free 10 year U.S. treasuries are trading to yield less than 2%, efforts to seek returns in the 4-5% range may entail risks that are not fully understood.  Under these circumstances, it is more important than ever for investors and their advisor(s) to increase their attention to appropriate due diligence.  Be sure you understand the implications and potential risks associated with current and prospective investments.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®