Clauses & Controversies Ep 165 - Total Return Swaps
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Nov 24, 2025 Total Return Swaps are at the center of a heated discussion about sovereign borrowing. The hosts dive into how these derivatives are used by governments like Angola, raising questions about their impact on existing creditors. Is collateralized sovereign lending a new threat to transparency in debt management? They explore the mechanics of these deals, the potential for dilution, and the implications for pricing in the market. With a nod to historical trends and moral hazard, the conversation underscores the classic challenges of sovereign lending.
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TRSs Can Mask Contingent Sovereign Debt
- Total return swaps (TRSs) appear as collateralized, contingent instruments used by distressed sovereigns to obtain credit.
- They may keep obligations off official debt stock and change creditors' recovery expectations in default.
Contingent Bonds 'Spring' On Default
- Reported structures involve bonds that 'pop into existence' and sit with intermediaries as contingent collateral.
- On loan default those bonds could be delivered, effectively diluting other creditors post-default.
Venezuela Example Of Hidden Instruments
- Mitu recounts Venezuela-style deals where domestic securities were issued to insiders and not fully counted as public debt.
- Those practices illustrate how sovereigns can hide contingent liabilities and keep debt off official books.