In the course of a pretty wonky piece on CDOs, Felix Salmon points out that the modern financial environment weakens the political position of creditors. Back in 1975, when New York City was on the verge of default, its bonds were uninsured, and held mostly by the city’s rich and its biggest banks. Both sets of bondholders were relatively few in number and invested in the city’s long-term survival. The creditors were able to come together and speak with one voice to force wage cuts and layoffs on the unions and service cuts on city residents. Today, bondholdings are dispersed around the world, so it’s hard to imagine a similar workout in 2009.
There’s an interesting parallel with Argentina’s deliberate default early this decade (a default which followed the script laid out in this LBO article “How to default.”). Because Argentina’s debts were held mostly by bondholders all over the place, many with rather small holdings, the creditors were in a very weak bargaining position. The contrast with the debt crisis of the early 1980s was stark. Then, a dozen bankers, backed by the IMF, could face down a finance minister in a conference room and demand the concessions for which neoliberalism became famous. But that was no longer possible in a world dominated by bond finance.
And in today’s securitized, derivatized world, mortgage holders often don’t know who their creditors are. In fact, it could even be easier for debtors in a single neighborhood to organize than their creditors, who could be anywhere from Frankfurt to Abu Dhabi.