10/26/1993

BAD DEBT GOOD NEWS FOR DOCTOR DOOM

Eric Ellis, Hong Kong

HONG KONG's Doctor Doom, Marc Faber, must be the only person in the world who's bullish about North Korea.

"The more hermetised, isolationist and crazy the Great Leader (North Korea's President Kim Il Sung) gets, the better it is for me," he says.

That's because the pony-tailed Faber - the former Asian chief of Wall Street junk bond kings Drexel Burnham Lambert - has loaded up with millions of dollars worth of bad North Korean debt in his certainty that the Hermit Kingdom will soon be forced to pay its bills. "If they were to launch the nuclear attack we all fear tomorrow, banks would panic and the debt would fall again," Faber says.

"But the retaliation would finish Kim in three days and a unified Korea would then be open for business. Our paper will be worth 100c in the dollar."

Surrounded if not inspired by what he claims is the world's most extensive collection of communist revolutionary memorabilia - clocks, plates, posters, Mao busts - the Swiss-born Faber scours the world's basket-case economies looking for opportunities.

A permanent sharemarket bear (he called the 1987 world crash and predicted the long Tokyo slump), he's also holding bad paper from Cuba, Peru and Ecuador and is aggressively sniffing around for debt owed by Angola and Sudan.

Faber says the world is awash with bad debt, a hangover from the lending spree of the 1970s when bankers laden with Middle East petrodollars sallied forth into the developing world.

ANZ-Grindlays is one that was caught when a 1970s syndicate led by Grindlays financed a $US500 million wheat trade with communist Pyongyang, only to see the buyers eat the grain but, conveniently, forget about the filthy capitalist notion of interest and debt repayment.

ANZ-Grindlays has long amortised the debt as a business mistake but the paper is still floating around with some value.

Faber said he recently bought some for less than 10c in the dollar, adding to his international exposure he enigmatically says is worth "millions".

But what if, like North Korea or the regime that follows the Kim dynasty, a country simply refuses to recognise or honour previous debts? "Doesn't happen," he says. "Banks have long memories and countries always need money."

He cites the example of Vietnam, where he bought some debt two years ago for 10c in the dollar. Today he claims it's worth 44c.

Peruvian paper was trading at 3c in the dollar before the Brady plan but today, with the Shining Path terrorists in trouble and President Alberto Fujimori making solid if autocratic tracks into the economy, it's worth 44c, an appreciation of just under 1,500 per cent.

Faber says Iraq is another sovereign borrower that has good potential, as the following conversation suggests:

Faber: Saddam Hussein owes Bulgaria $US1 billion.

AFR: How on earth would you ever know something like that?

Faber: Because I recently went to Sofia and the central bank governor is my friend.

Faber says a key to playing the Third World debt markets is knowing who's holding the debt.

"A lot of eastern European banks are holding paper from Vietnam, Burma and Cuba from the old Comecon days," he says.

"The new governments that now control these eastern European countries no longer have links with these countries and want to get rid of the old memories.

"I have a lot of contacts in these places and it's always in convertible currencies.

"A lot of the buyers are people in the countries who have inside information and who know what the prospects are."

At present he's scouring the world looking for Angolan debt, now trading at around 25c in the dollar, which he predicts in 10 years time will be worth 100c.

Apart from civil war-wracked Angola - "the world's richest country" - Faber also likes Cameroon and Cote D'Ivoire, both good commodity plays at a time when commodity prices are at cyclical lows.

AFR: But Angola has got to be the world's most irretrievable basket case?

Faber: Maybe. But what happens if a Carlos Menem gets into power there. Argentina has gone from 12c to 60c in two years.

And then there's Sudan, "another good long-term buy".

"There's about $US1 billion of Sudanese debt around and you can buy for 0.5c in the dollar," he says.

"It's only got to go up to 1c and you have doubled your money.

"Just think if it rained."