When professional bond investors analyze sovereign or state debt offerings, there are typically two approaches.  One approach is to entirely trust those underwriting the bond offering and the elite institutional analysts penning glowing research. The other approach is to view an offering through a mathematical lens and recognize the probability of debt default in a sovereign region, municipality or corporate structure.

The first approach, perhaps most evident in the Petrobras 100-year bond episode, can lead to lawsuits between institutional investors and their “trusted” counter-parties. The second approach, outlined in research by JPMorgan’s Michael Cembalest, is to look at debt from a logical, mathematical ratio standpoint. From this perspective, the JPMorgan report makes the statement that New Jersey’s problems are “not mathematically solvable” while the warning flag in major states such as Illinois and Connecticut is waving strongly in the wind.


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