Equicapita UpdateAugust 7, 2012

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ROLLOVER RISK WORLD TOUR 2015

Rollover risk can be defined broadly as the possibility that a borrower cannot refinance maturing debt. If combined with insufficient funds/liquid assets on hand to fund the shortfall, the borrower will experience a liquidity problem and technically may be considered insolvent.

Here is a concrete example of rollover risk that may be unfolding right in front of us: Bloomberg estimates that the developed economies have $7.6 trillion of debt maturing in 2012 led by Japan ($3 trillion) and the U.S. ($2.8 trillion) and more than $8 trillion must be financed when interest payments are included. By 2015 it is estimated that half of the debt of the top 10 global debtors ($15 trillion) will mature and must be rolled.

Equicapita Update

DEBT MATURING IN 2012 ($)

Japan 3,000 billion

US 2,783 billion

Italy 428 billion

France 367 billion

Germany 285 billion

Canada 221 billion

Brazil 169 billion

U.K. 165 billion

China 121 billion

India 57 billion

Russia 13 billion

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Equicapita Update (continued)

Considering that global GDP is estimated at $70 trillion the magnitude of these numbers beg the questions of 1) how this will be financed and perhaps more importantly 2) at what rates?

Other than the US bond market which seems well bid for now (at least by the Federal Reserve), private lenders are retreating from peripheral markets at the first hint of trouble. If this continues, either the monetary authorities will have to step in and monetise the maturing debts or interest rates will have to rise considerably from current historic lows. We are seeing the outcome of this process taking place on a relatively modest scale in Spain and Greece - what will it look like when it goes global?

Sadly, as the political class has become aware of the rollover issue, rather than take any productive steps to address their debt addiction, they have partnered with the central banks to attempt to keep interest rates suppressed for an extended period - hoping this will allow business as usual to continue. Politicians want to continue to run deficits and central banks do not want “too big to fail” financial institutions to suffer losses on their loan portfolios. What both parties have yet to learn is that you can control interest rates or the purchasing power of money, but not both indefinitely. I am confident that the law of unintended consequences will be sure to provide that instruction in due course.

USEFUL INFO

Austerity Chooses You, You Don’t Choose Austerity - Media and Keynesiam nostrums that the insolvent sovereign borrowers of the world have a choice between austerity and a continuation of their debt binges are baffling to read to say the least. When you are bankrupt you do not choose austerity, it is forced upon you in one fashion or another.

ZIRP is Old News - Watch out for NIRP - Yes ZIRP is now officially out of fashion. Pulling firmly into the lead in the race to the bottom, the Danish Central Bank recently announced that it was implementing a Negative Interest Rates Policy on certain deposits. ZIRP is dead, long live NIRP.

Bank of America - In the Long Run - Recent report by Bank of America on some long-run relationships and trends.

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CUMULATIVE DEBT MATURING OUT TO 2015

2012 2013 1014 2015 2016 2017 2018 2019 2020 2021 2022 2023+

By 2015, half of TOTAL outstanding debt in the world’s top 10 debtor nations will come due, which is more than $15 trillion dollars of sovereign debt!

Source: PFS Group

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Equicapita Update (continued)

North American Gas Prices in 2015 - Recovery to $5/mcf? - Further to our developing thesis of getting long shut-in North American NG reserves, First Energy recently published a report saying the worst for the North American NG space was still in front of it (next 12 months) but then rapid price recovery was expected as drilling investment is collapsing and marginal operators are forced out of the market.

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