Disassembly Required by Geoff Mann

Author:Geoff Mann [Mann, Geoff]
Language: ara
Format: epub
Publisher: AK Press
Published: 2013-03-14T04:00:00+00:00

A BRIEF BUT CRUCIAL ASIDE ON BOND MARKETS

This trade impact is one manifestation of a crucial problem in international capitalist political economy, one very important from a social justice perspective. When an economically influential nation like the US changes its interest rates, especially when it makes its currency and bonds more attractive to finance capital and foreign investors, it affects virtually every other nation in the world. Like the US, at any one moment in time, most nations owe money to international creditors, or want to raise money, say, to pay for domestic infrastructure. The principal arena of this international credit and debt activity is the notorious, much-discussed-but-rarely-explained “bond markets.”

Because bond markets are so important to modern capitalist governance, it is worth pausing to explain how they work. Here’s how: if the government of a nation—Brazil, for instance—wants to pay for infrastructure, service some debt, or undertake other major expenditures, the principal means to obtain the necessary funds is the international bond market. To raise the money, Brazil must issue bonds, which are also called “debt,” in the form of repayment contracts of predetermined length. Bonds have a face value, known as “par” (say $100,000 for this example, but they can have smaller denominations), and a predetermined “maturity” or term, at the end of which they are “redeemed.” Most states issue both “government bonds" (denominated in their own currency) and “sovereign bonds" (denominated in a foreign currency, usually a widely trusted “reserve” currency, like the US dollar), for a wide range of maturities, from one month to thirty years. In other words, states sell bits and pieces of their debt (i.e., the claim to a certain amount of repayment from that state), which purchasers then hold, and for which they are repaid once the debt contract is up. Most states, especially in the developing world, tend to auction five- and ten-year-term debt, but in this brief explanation we will use one-year bonds, since the idea is the same and we don’t have to work out compound interest.

In this example, each bond represents a claim on the Brazilian government for $100,000 in one year’s time. Since bond dealers are not going to purchase bonds for “par,” to be repaid the same amount they loaned with no interest on top, most bonds with maturities of more than a year have a “coupon rate.” The coupon is the annual interest rate the issuer promises bond-holders, who will also get the “par” value when the bond is redeemed at maturity. In addition, when the Brazilian state auctions or “floats” bonds (usually with the help of, and often heavily backed by, an investment bank like Goldman Sachs or JP Morgan), not only must it offer a guaranteed annual return in the form of the coupon, but, because it is an auction, the issuer cannot command a particular price for the bond. If you are the US, whose bonds are in high demand (especially when considered a “safe haven” in crises), you might be able to sell your debt at a “premium,” i.

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