The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.

The man who first hired me to work in emerging markets investing used to claim that understanding the idiosyncrasies of these markets was entirely a matter of understanding corruption. Predicting policy choices, he argued, was a matter of figuring out which domestic interest would pay the highest bribes. Capital flight? Just a question of how corrupt actors were feeling about the security of their ill-gotten gains. At the time, my youthful enthusiasm resisted accepting wholeheartedly such a cynical conclusion. It wouldn’t be unfair to say that a good deal of my many years of practical education since then has consisted of coming to a full understanding of my old boss’s dictum. It turns out that countries run by crooks tend to blow up. Go figure.

The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.

Brazil has been one of the most confidence-inspiring credit stories in Emerging Markets. At the end of September, Moody’s awarded the country an investment grade rating. But while most of the market showers praise on the tightest-of-the-Latin-majors credit spreads, the 6 Bs of ratings, and dollar-crushing currency, a certain class of creditors is shouting about an imminent default. Their shouts are going largely unheeded, and they are learning a hard lesson about sovereign lending to Emerging Markets. In EM, there is no solidarity among creditors.

The controversy relates to a class of debts called precatorios. These are instruments representing judicial claims against government entities - the federal government, states, and municipalities. While this might sound like a small and obscure corner of government finance, litigating against the government has become something of a Brazilian national pastime. Hopeful plaintiffs don’t lack for grounds of complaint. The inflation stabilization plans of the 1980s imposed very complicated monetary correction formulae on all manner of wages, pensions, and prices, sparking disputes that continue to this day. Price controls on ethanol, also from that happy decade, have likewise spawned generation-spanning suits. At the same time, Brazilian jurisprudence has an incredibly expansive notion of direitos adquiridos - “acquired rights” - that cannot be messed with. Think of it as the insanely broad conception of fault that you find in American malpractice law, applied to the field of takings. Any meaningful reform creates losers; in Brazil they are only losers (from a new law or policy) as long as it takes to sue the government, at which point they become winners (of a lawsuit). In fact, government legal losses have consistently enough generated large liabilities for the government that most analysts’ fiscal projections still include a line for “skeletons” - the term of art for old claims that get adjudicated against the government.

The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.

Last week, Côte d’Ivoire and its creditor committee reached an agreement on a restructuring of the African country’s defaulted Brady bonds. Your correspondent, at the risk of showing his age, admits his involvement in the birth of the Bradies back in 1998, at the crest of a wave of optimism about Africa. Abidjan, no longer a defaulter, proudly hosted the emerging markets lending community at African Development Bank annual meetings a few weeks later. Côte d’Ivoire’s payments lasted longer than the African boom, but still managed only three coupon payments before lapsing into default.

The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.

Damn it felt good to be a Nigerian banker - until recently. Now, one of the largest banks is complaining of being the victim of “gang rape” (we’ll get to that in a bit) and it along with several others have ended up wards of the government. At the end of last week, Nigerian authorities finished their stress test of the first batch of ten top banks. The results must not have been pretty: the Central Bank promptly intervened in the running of five of these banks, firing the existing top management and replacing them with Central Bank appointees and simultaneously injecting a total of $2.5B of new Tier II capital.

The Nigerian banking system may sound like the punch line to a joke involving the rate of interest on yams or the subject heading of an email addressed confidentially to the reader on the basis of his reputation as a trustworthy and discreet individual, but in point of fact it was for a time both an emerging markets reform “success story” and, for its size, a not insignificant beneficiary of the boom in capital flows to the emerging markets. In 2004, then-Central Bank Governor Chukwumo “Charles” Soludo pushed the government to institute a new banking law. It required the then-fragmented and undercapitalized sector to meet new increased minimum capital requirements by 2005, sparking a wave of consolidation and recapitalization. From an unruly mob of small, flimsy institutions, many with capital bases less than $10M, emerged a surviving group of around 25 larger, cleaned-up banks.

The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.

Emerging Markets and derivatives are like alcohol and barbiturates: each on its own has attractions but create a recipe for choking on one’s own vomit when combined. And despite all warnings, rock stars (or in the case of finance “rock stars”), real and aspiring, continue to do just that. The latest set of investors to get the Jimi Hendrix experience: writers of CDS on the Kazakh financial institution BTA Bank. The bank, by some measures Kazakhstan’s largest, declared its intent to restructure its debt back in late April, after the authorities alleged its loan book to be riddled with undisclosed related-party deals and its controlling shareholder, Mr. Mukhtar Ablyazov, fled the country. On a loan book of KZT 2.4 trillion, it has now provisioned nearly KZT 1.5 trillion, the sort of write-down that makes Merrill Lynch look like a bunch of pikers. Sadly for creditors, it didn’t occur to Mr. Ablyazov to try to pitch the bank to Ken Lewis.

The chicanery at BTA Bank itself is another story, though. ISDA’s Determinations Committee declared a credit event on April 29th. The baleful interaction of EM and derivatives relates to the CDS credit event auction. BTA Bank had issued a fairly full curve of eurobonds, most of which traded in the wake of the default in the mid-20s. The spirit of creativity was strong with the Kazakhs, though, and the bank was understood to have done a fair number of private deals. Less well-understood was the magnitude of off-balance sheet borrowing. A few “shell” borrowers - reputedly related to BTAS’s controlling shareholder — had taken out loans from western banks, which in turn got guarantees on these loans from BTA. The “shell” borrowers in turn onlent to Ablyazov-related entities (as Borat would say, “Naughty, naughty!”). Credit Suisse was the most active lender; at the time of making the loans - which yielded a premium to other BTAS obligations - it had gone and hedged itself by buying CDS from the market.