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Working paper

Глобальный долг: погашение или кризис?

Simple debt monetization model is proposed to analyze one of the major consequences of global excess liquidity. Stochastic dynamics of liquidity is decomposed into several regimes to be distinguished due to changes in the standard asset portfolio. Thus, regime of complete market that, as a rule, allows for the debt monetizing in full, is modeled as analogue to the Black-Sholes equation. Further transition into regime of excess liquidity gives rise to severe distortions in relationships between debt and liquidity due to large increases in positive feedbacks speeding up the growth of debt outstanding as well as of notional debt. These outcomes are straightforward consequences of the widespread practice of debt redemption which allows for the usage of new debt obligations, the latter being similar, for example, to the asset-backed commercial paper, ABCP. If the market micro structure continues to evolve towards the fractal cluster of debt buyers as liquidity approaches its critical level, then fi nancial system percolates. At the point of singularity market collapses since infi nite debt cannot be redeemed with fi nite liquidity. The model demonstrates that, unlike the mere “paper losses’ of the 2007 credit crunch, asset securitization and fi nancial innovation processes might under particular conditions produce the total crash of global fi nancial system. Simple site percolation methods make it possible to evaluate the conditional probability of such an outcome as being equal to 27 percent.