Debt Arbitrage

[whatstheofficerproblem]

Long time ago, during the cold war era, right before the Russian Ruble massively lost it's value, I heard that some rich people and Hedge Funds/Businesses anticipated this fall and took out massive loans from Russian banks with help of corrupt bank officers. They then converted everything to USD, with a strengthening dollar and a weakening ruble, it is said that as soon as the Ruble fell, they quickly repaid all this debt for less than half of their debt amount and pocketed the rest as it is now pure profit. Is this true? If it is, why are there not many people doing this again? The ruble fell heavily during Q1 2022, why not take out a loan a couple Q's before and profit? Same is the case with Ukranian hryvnia. I know it can be difficult to time these things and I'm speaking with a lot of retrospective bias, but any business entity with a loan from these countries must have enjoyed this year because it was easier to repay? Thoughts?

Edited December 30, 2022 by whatstheofficerproblem

[Dinar]

During the Cold War era, there were no hedge funds in the USSR and the Soviet banks generally did not lend to individuals.  There were essentially no private businesses either.  Also, it was illegal to own foreign currency in the USSR.  

 

What you are describing did happen in Germany post WWI.  The strategy also depends on interest rates paid.  In Ukraine, many assets probably were destroyed.  The ruble has actually strengthened against the USD, at least on the "official" market.

[ValueArb]

Because Russia was going to win its war in 5 days.

 

Then it was going to win in a couple of months.

 

Predicting the future is hard. Those who were best positioned last year to capitalize on the bet you described also have had a nasty habit of falling out of windows.

[whatstheofficerproblem]

7 hours ago, Dinar said:

there were no hedge funds in the USSR

Yeah, I meant businesses and rich people, well since it was in Germany, I was confused, any chances an event like that can happen again? A lot of people seem bullish abuot the Yen.

[Dinar]

17 minutes ago, whatstheofficerproblem said:

Yeah, I meant businesses and rich people, well since it was in Germany, I was confused, any chances an event like that can happen again? A lot of people seem bullish abuot the Yen.

There is always a chance, but it is difficult.  A general rule of thumb is when a war starts, you borrow long at fixed rates and buy productive assets.  The problem occurs when either your assets get destroyed in war, or revolution or via price controls.  

[UK]

We had a similar period in my country with temporary money, just after Ruble went toilet paper. The problem with such strategy was nobody would lend you any serious money for a long term in shitty currency in the first place or interest rates would be prohibitively high. There were some who were able to borow from the state owned banks, while making serious money in such way, but those were not market based transactions so to speak:).

 

However, and I am not sure about this in the near or mid term, but I sometimes I wonder if borrowing EUR to fund investments in USD or other currencies would be a good strategy in the long term. EU, because of its debts, demographics etc, not to mention new energy and war issues, seems to be under some serious pressures and structural disadvantage vs rest of the world. I can not imagine very high EUR rates for a long term or relatively vs USD, and region could be forced to revert to zero rates just like JPY in the future, so 1. interest rates on EUR loans probably will stay lower with 2. a possibility for further EUR depreciation. It would be interesting to hear what other think about this, especially those based in EUR? If you invest in US/USD and use some leverage, do you borrow in USD or EUR? 

[backtothebeach]

2 hours ago, UK said:

However, and I am not sure about this in the near or mid term, but I sometimes I wonder if borrowing EUR to fund investments in USD or other currencies would be a good strategy in the long term. EU, because of its debts, demographics etc, not to mention new energy and war issues, seems to be under some serious pressures and structural disadvantage vs rest of the world. I can not imagine very high EUR rates for a long term or relatively vs USD, and region could be forced to revert to zero rates just like JPY in the future, so 1. interest rates on EUR loans probably will stay lower with 2. a possibility for further EUR depreciation. It would be interesting to hear what other think about this, especially those based in EUR? If you invest in US/USD and use some leverage, do you borrow in USD or EUR? 

 

Predicting currencies is hard.

 

I don't think it is so clear cut, either. Euro zone debt to GDP is about 96%, U.S. debt to GDP 137%, thanks to the binge spending of Trump and Biden. On the surface Europe can afford higher interest rates (while supporting Greece and a few other high-debt countries) better than the U.S.? On the other hand the U.S. can just pay interest with new debt, which the Fed buys up, all the while keeping inflation under control, until the end of days (see Japan)?

 

I don't claim to understand the intricacies, or if the debt to GDP is entirely comparable between Europe and the U.S., maybe wabuffo can chime in.

 

As a frequent traveller, from a buying power point of view, I think 1 EUR = 1 USD sounds about right.

 

As an investor I don't hedge between USD / CAD / EUR. Over the long term it should average out ok. There actually seems to be a smoothing effect sometimes: US stocks go up more than EUR stocks for a period, but the dollar is weakening at the same time, and vice versa.

[UK]

2 minutes ago, backtothebeach said:

 

Predicting currencies is hard.

 

I don't think it is so clear cut, either. Euro zone debt to GDP is about 96%, U.S. debt to GDP 137%, thanks to the binge spending of Trump and Biden. On the surface Europe can afford higher interest rates (while supporting Greece and a few other high-debt countries) better than the U.S.? On the other hand the U.S. can just pay interest with new debt, which the Fed buys up, all the while keeping inflation under control, until the end of days (see Japan)?

 

I don't claim to understand the intricacies, or if the debt to GDP is entirely comparable between Europe and the U.S., maybe wabuffo can chime in.

 

As a frequent traveller, from a buying power point of view, I think 1 EUR = 1 USD sounds about right.

 

As an investor I don't hedge between USD / CAD / EUR. Over the long term it should average out ok. There actually seems to be a smoothing effect sometimes: US stocks go up more than EUR stocks for a period, but the dollar is weakening at the same time, and vice versa.

 

I do not hedge currencies either. However not hedging plus borrowing in EUR would be much more like making a bet on currencies. Regarding EU I am much more sceptical, total debt maybe still ok, but just look at Italy, and it would be hard to fix its debt like Greece's, because of different size. But most important difference from US I think is potential long term economic growth rate. Just from demographics its 1 or even more per cent defference? And then all inovation, government size, energy independence, now security, millitary and other issues. But yes, I am no way considering USD undervalued after last year or two, and it could move against such strategy painfully at any time. But what odds of EUR gaining against USD in 5 or 10 years?