Japan will be consumed by a debt crisis surpassing the U.S. subprime crash, a leading U.S.-based hedge fund manager has warned, telling investors that "the beginning of the end has begun" for Japan's finances.
Over-indebted governments, and especially the precarious state of Japan's finances, set the tone for the high-profile Ira Sohn investment conference in New York on Wednesday.
Kyle Bass of Hayman Capital, a $1.8 billion Texas-based hedge fund and a noted Japan bear, said signs of the crisis had started to emerge, as banks and dealers become less willing to take the other side of negative bets from funds such as his.
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Mr. Bass said that the Japanese government was "insolvent" and described recent accounting moves that included issuing a new form of debt called Japanese compensation bonds as "adding a Ponzi scheme to a Ponzi scheme".
Mr. Bass, who was one of the hedge fund managers to famously bet against the value of subprime mortgage-backed securities in 2007, said that the quantitative argument was now complete, and that it was simply a qualitative argument about when crisis hit Japan. He predicted that inflation in Japan would hit 2 percent and that the yen would fall below ¥125 to the dollar.
Mr. Bass was not entirely bearish, however, as he extolled the prospects for Dex Media, whose stock promptly surged 22 percent to $16.72 in trading.
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Paul Singer of Elliott Management opened the conference with a bleak outlook for the global financial system. He said that "there are no safe havens" in today's markets, providing an overview of the world economy.
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The investor is best known for his multiyear battle with the Argentine government, where he has refused to accept restructuring of the South American countries' sovereign bonds. He said that long term bonds across the developed world, in the U.S., Japan, the UK and Europe, were all trading "at the wrong price".
Mr. Singer endorsed the argument that sovereign debt balances did not paint a true picture of government finances, arguing that off-balance sheet liabilities such as pension promises meant the true debt figure for Europe and the U.S. was really 500 percent of national output.
"Given the demonstrated inability of the developed world to make obvious, minor non-threatening changes to programs of long-term aid", he said, such entitlement programs should be considered as long-run debt. "They are legislative programs, and of course debt is contractual."
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The investor also said that it was impossible to gain a true understanding of the nature of risks taken by the surviving 10 to 15 global financial institutions. Mr. Singer said that the typical balance sheet for a large financial institution held $150 billion to $200 billion equity, against $2 trillion to $2.5 trillion of assets.
Yet each also had $50 trillion to $80 trillion of notional derivatives – "that's trillions with a T", said Mr. Singer. He said that believing it was possible to understand these risks with concepts such as "value at risk", a popular analytical framework used by banks to assess trading risk, was "naive".