Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Joe. It's been a
Speaker 1: while since we talked emerging markets. It really has been,
Speaker 1: and probably to our detriment, because there is a lot
Speaker 1: going on with the commodities boom, the US dollar boom,
Speaker 1: the tightening cycle, inflation, there's the distress in Sri Lanka
Speaker 1: among others, So there's a lot together. There's a lot
Speaker 1: that's been going on, right, And every time you see
Speaker 1: the US raise interest rates, you generally see some pain
Speaker 1: in emerging markets because the dollar goes up and the
Speaker 1: foreign currency payments that governments who have borrowed in the
Speaker 1: dollar have to pay those go up. And it just
Speaker 1: feels like at the moment, with everything that's going on.
Speaker 1: And you mentioned the commodities boom, Normally a commodity the
Speaker 1: spoon would be great for emerging markets, but this time
Speaker 1: it seems to come with a lot of imported inflation. Yes,
Speaker 1: so this time it seems like a really toxic mix
Speaker 1: for m and like acute shortages. So you could have
Speaker 1: a commodities boom and it's like, Okay, there are a
Speaker 1: bunch of commodity producing countries seeing big, you know, cash
Speaker 1: increase in their imports or their their cash flows right now.
Speaker 1: But you know, if you're a country that doesn't have
Speaker 1: much domestic food, or country that doesn't have much domestic
Speaker 1: wheat specifically, and there's a grain shortage, then you're it's
Speaker 1: is a very distressing time. Yeah, very toxic mix politically
Speaker 1: as well. And of course the other big thing that's
Speaker 1: going on is Russia, and we've had lots of people
Speaker 1: expecting Russia to default on its bonds. That seems almost
Speaker 1: certain to happen now given that the U. S. Treasury
Speaker 1: has imposed even more restrictions on trading in the secondary
Speaker 1: market of the debt. They've also stopped investors from accepting
Speaker 1: bond payments from Russia. So it seems like a default
Speaker 1: is definitely going to happen, which means, of course that
Speaker 1: we need to talk about all of this means all right,
Speaker 1: without further ado, I am very pleased to say we
Speaker 1: really have the perfect guest to discuss. We are going
Speaker 1: to be speaking with Jane Newman. He is a former
Speaker 1: portfolio manager at Elliott, very instrumental in Elliott's pursuit of Argentina.
Speaker 1: And all the drama that happened there. He's a sovereign
Speaker 1: debt specialist in general now turned novelist and his book
Speaker 1: is called Under Money. That's out now. Jay, welcome so
Speaker 1: much to the show. Tracy, thank you, and thank you, Joe,
Speaker 1: thanks for coming up. So maybe, given your decades of
Speaker 1: experience and EM, maybe just to begin with, we could
Speaker 1: ask the big question, how bad is it right now
Speaker 1: for EM and what is the most striking historical analogy
Speaker 1: or parallel that you would compare it to. I think
Speaker 1: it's almost the perfect storm for EM. And the only
Speaker 1: real comparison I can draw is from the very beginning
Speaker 1: of Third World debt crises, which is the eighties. Um
Speaker 1: the Foreign Sovereign Immunities Act was passed in nineteen seventy six,
Speaker 1: the Stateiumunities Act in England nineteen seventy seven, and then
Speaker 1: we saw a huge, huge volume of lending. It's the
Speaker 1: time when Walter Riston famously said to excuse lending to
Speaker 1: development countries, he said, countries don't go bankrupt, which is
Speaker 1: completely accurate and totally useless if you're a creditor. But
Speaker 1: what we saw there was a period in which something
Speaker 1: like twenty five countries defaulted. UH. And what years this
Speaker 1: was in The faults started in the late seventies, but
Speaker 1: they extended into the eighties. UH. And they weren't resolved
Speaker 1: really into the nineties. UH. Of course the case of Argentina,
Speaker 1: which went on even longer. UM. But we're talking about
Speaker 1: a period that could be very, very stressful and distressing
Speaker 1: for developing country borrowers. Just going back, actually before we
Speaker 1: get too much on the present. Why did countries default?
Speaker 1: They default because markets closed to them, And that's what
Speaker 1: typically happens. The initial defaults in Poland and in Mexico
Speaker 1: made lenders very nervous, and when it came time to
Speaker 1: roll over the debt, there was there were no takers.
Speaker 1: That's what's happening today. I mean, it's it's uh, it's
Speaker 1: almost an inedible process when when things are good and
Speaker 1: money is easy, people pile in and the underwriters find,
Speaker 1: you know, plenty of buyers, but all of a sudden,
Speaker 1: when one country defaults. Let's take Lebanon, Let's take Sri Lanka,
Speaker 1: which you mentioned, Everyone says, WHOA, what about country X
Speaker 1: and country wine, country Z, And then they become nervous
Speaker 1: and then the debt can't get rolled, is it inevitable
Speaker 1: in the current situation. The investors start pushing back, and
Speaker 1: I mean the reason I ask is because how many
Speaker 1: times has Argentina default it? Now? And someone out there
Speaker 1: is always buying the new bonds that it issues. It
Speaker 1: feels like people investors learn their lesson for you know,
Speaker 1: maybe a month, and then the next year they forget
Speaker 1: it again and people are buying em indiscriminately. It's it's
Speaker 1: um It is a complicated ecosystem, and it's it's rotation
Speaker 1: because what happens in the first instances that the buyers
Speaker 1: tend be real money buyers, retail investors through mutual funds
Speaker 1: that are responding to advertisements. You've you've seen those ads
Speaker 1: in the in the paper which show past performance and
Speaker 1: they and they always show the best performing funds, and
Speaker 1: periodically those are emerging market funds, and that's when sales
Speaker 1: pick up and the the the mutual fund investor and
Speaker 1: buyer is driven by indices. So there's always a buyer.
Speaker 1: If the country's in the index, whether it's Argentina or Russia,
Speaker 1: those bonds have to get included and there that's why
Speaker 1: they're bought. Then what happens is after default, they get
Speaker 1: puked and the more opportunistic investors like hedge funds come
Speaker 1: in and the cycle starts over again. You mentioned that
Speaker 1: quote in the beginning that countries don't go bankrupt, and
Speaker 1: as you say, it's maybe true, but completely irrelevant to
Speaker 1: an actual creditor of the country, whether they're gonna get
Speaker 1: paid back or not. Why do countries choose to default?
Speaker 1: I mean, in theory, you know country, a government has
Speaker 1: certain choices it can make. It can cut back on
Speaker 1: domestic spending to prioritize lending. What are the conditions that
Speaker 1: tend to proceed a government making the choice, like, you
Speaker 1: know what, we're not going to We're what? Why does
Speaker 1: the why did they do that? It's uh so, so many,
Speaker 1: so many questions nestled and nested in what you just asked, Joe.
Speaker 1: It's always political. Countries don't typically borrow with the intention
Speaker 1: of default, but on some level it's always in the
Speaker 1: back of the mind of a politician because they borrow
Speaker 1: to get money they can use for their own purposes,
Speaker 1: whatever those are, whether there for legitimate infrastructure and and
Speaker 1: building or corrupt purposes, which in many cases they are.
Speaker 1: They they are, but it's a political decision. And when
Speaker 1: the it's only when the the money is cut off
Speaker 1: or threatened to be cut off, that political figures in
Speaker 1: borrowing countries decide that, well, maybe it's not worth the
Speaker 1: trouble is it is part of it, the idea that
Speaker 1: politicians are satisfying a domestic constituency, and so foreign investors
Speaker 1: kind of are a very easy demographic to just you know,
Speaker 1: leave out and say, well, we're going to screw over
Speaker 1: the foreign investors in order to satisfy our population easier
Speaker 1: and easier for a variety of reasons. One you've mentioned,
Speaker 1: which is that markets have short memories, and that's certainly true.
Speaker 1: But the other pieces that when a country runs into trouble,
Speaker 1: the multilateral organizations all rally around it, and the actually
Speaker 1: other governments rally around it. So if in the case
Speaker 1: of Sri Lanka is just a case in point, we're
Speaker 1: going to see we will see uh, the I m
Speaker 1: F and the World Bank and the Asian Development Bank
Speaker 1: and the G seven and the G twenty all saying, oh,
Speaker 1: poor Sri Lanka, not blaming Sri Lanka for for their problems,
Speaker 1: but looking for an opportunity to fleece foreign foreign lenders
Speaker 1: and that that's that is a consistent pattern. What's different today, UH,
Speaker 1: And I know we'll get to talk about this is
Speaker 1: the role of China, because China is increasingly has the
Speaker 1: whip hand in essentially in developing country lending. So explain
Speaker 1: that further. What exactly is the role of China and
Speaker 1: emerging markets and how much does the outlook for e
Speaker 1: M defaults depend on what China chooses to do or
Speaker 1: not do. I think China is the critical element in
Speaker 1: emerging market lending. The One Belt, One Road initiative has
Speaker 1: meant that China has UH provided money either loans or
Speaker 1: investments in dozens of countries around the world. For ports,
Speaker 1: for rails, for UH, communications, infrastructure, you name it. The
Speaker 1: Chinese are promoting it and UH and lending money to
Speaker 1: developing countries. So China has become and this this is
Speaker 1: the critical element. China has become a huge lender and
Speaker 1: investor in developing countries. But no one knows how big
Speaker 1: they are. No one knows, I mean the Chinese know,
Speaker 1: but no one else because the contracts under which they
Speaker 1: invest our secret. I've I've asked on many occasions to
Speaker 1: see a copy of these loan agreements, and it's always
Speaker 1: we can't talk about that. It's it's part of our agreement.
Speaker 1: And I don't think the even the I M F
Speaker 1: has a clue what the scale of those investments are,
Speaker 1: which means that when you face a restructuring, you've got
Speaker 1: a creditor, a very aggressive and important creditor, China, which
Speaker 1: does want to take a discount at all. So you
Speaker 1: have a super senior element there that we've never seen
Speaker 1: before in the history of E M lending. I was
Speaker 1: about to ask what kind of creditor is China. I know,
Speaker 1: it's hard to tell because we haven't really seen them
Speaker 1: enter a massive default cycle since they wrapped up their lending.
Speaker 1: And you're completely right that it's hard to tell the
Speaker 1: scale of that lending, and Bloomberg has made attempts at
Speaker 1: various points in time to put a number on it.
Speaker 1: It's a very very non transparent. But what sort of
Speaker 1: indication do we have of how they might behave in
Speaker 1: a distress situation, Well, how they behave in pretty much
Speaker 1: every commercial situation. Uh, they're right and you're wrong, and
Speaker 1: they're implacable foes on many levels, but particularly when it
Speaker 1: comes to the debt. It's it's just I'd like to
Speaker 1: just go back to this very little geeky but I
Speaker 1: think important point, which is, can you imagine a sitting
Speaker 1: down at a negotiating table with a group of creditors.
Speaker 1: You've got the I m F, the World Bank, other
Speaker 1: multi lateral institutions, and you've got different creditor groups, banks,
Speaker 1: industrial lenders, investors, UH and bond holders. Everyone's at the table,
Speaker 1: everyone's documents are on the table except for China. So
Speaker 1: you have this huge force, you know, in the room
Speaker 1: and outside the room that won't tell you how much
Speaker 1: they owe and isn't willing to take a discount to
Speaker 1: make things make things fit together. So it's almost in
Speaker 1: that climate, it's actually it actually becomes, in my view,
Speaker 1: impossible to have restructurings that really get countries out of
Speaker 1: the woods and put them on a strong financial path,
Speaker 1: because you've got one. Used to be that we would
Speaker 1: complain about the I m F being insisting on being
Speaker 1: super senior. Now you've got a creditor that is put
Speaker 1: in placing itself super senior to the I m F.
Speaker 1: Something UH that we talk about on the show from
Speaker 1: time to time is this sort of difference between you know,
Speaker 1: the financial cycle and the economic cycle. And you know,
Speaker 1: what we've been talking about so far, it's seems like
Speaker 1: very much the financial cycle. And you mentioned, you know,
Speaker 1: you have this situation where one country or two countries
Speaker 1: default suddenly all the money pulls back or on the flip.
Speaker 1: A bunch of retail investors see that, you know, looking
Speaker 1: open their copy of Barons and see that I'm the
Speaker 1: best best last five years. That's some e M funded Like, yeah,
Speaker 1: I'll put my money in there. What is the So
Speaker 1: there's this global clearly downturn in the sort of liquidity cycle.
Speaker 1: The financial cycle is clearly in retreat. What's the macro cycle,
Speaker 1: like the sort of like actual like underlying ECNT cycle.
Speaker 1: And how much stress is that putting countries under? I
Speaker 1: think the what's what's happening even in the last three months,
Speaker 1: prices of energy and foodstocks is something we haven't seen
Speaker 1: in a long long time, and it puts a lot
Speaker 1: of pressure on every country because the first, the first
Speaker 1: obligation of a government is to is to keep its
Speaker 1: people warm and fit. And I think the extent that
Speaker 1: that's put at risk, and it is at risk now
Speaker 1: in in dozens of countries. Countries really have no choice
Speaker 1: but to prioritize those needs over payment of foreign debt.
Speaker 1: It doesn't mean that they don't respect foreign debt or
Speaker 1: intend to restructure it or repay it at some point
Speaker 1: in time. But I think in the near term they'll
Speaker 1: make a correct political decision for themselves to delay, defer,
Speaker 1: or deny those payments. So Joe asked a question that
Speaker 1: I thought was interesting, which is why do countries default?
Speaker 1: And I want to ask a similar question about incentives
Speaker 1: and decision making. But you are at Elliott for a
Speaker 1: very long time. How did you decide what distressed investments
Speaker 1: to because you targeted, you know, some very specific not
Speaker 1: just countries, but very specific bonds issued by those countries.
Speaker 1: There are there are a few, um a few really
Speaker 1: important elements to any investing, and particularly sovereign debt investing.
Speaker 1: One is that the end. One is that the contract
Speaker 1: has to be strong, and sovereign bond contracts have gotten
Speaker 1: much much weaker over the last twenty years. Really a
Speaker 1: concerted effort on the part of the official sector. UH
Speaker 1: and the G seven Europeans have been at the at
Speaker 1: the forefront of this diluting covenants and making it more
Speaker 1: difficult to enforce in the event of a defall. But
Speaker 1: the most critical element is your basic financial analysis of
Speaker 1: the country. And uh and Tracy, you're absolutely right. You know,
Speaker 1: at Elliott we were extremely selective in the death that
Speaker 1: we bought because you really had to believe. You always
Speaker 1: have to believe when you're when you're buying sovereign debt
Speaker 1: that the debtor is capable of honoring its contracts. And
Speaker 1: so those are the two critical elements. Is the debt
Speaker 1: are able to pay? And contractually is there a way
Speaker 1: to keep them at the table. So I have to
Speaker 1: ask would you have bought Russian bonds with that in mind?
Speaker 1: I have never bought a Russian bond. I never would
Speaker 1: buy a Russian bond, Russian Russian um and in fact
Speaker 1: I hadn't I hadn't looked until recent days. I hadn't
Speaker 1: looked at the Russian bond contract for a very long time,
Speaker 1: and I had forgotten this that Russian debt Russia does
Speaker 1: not wave sovereign immunity. So the critical element of contemporary
Speaker 1: bond contracts is a waiver of sovereign immunity, which means
Speaker 1: that you can sue by agreement, you can actually go
Speaker 1: to court. You can go to discuss the issue exactly.
Speaker 1: You can go to court typically in either the US
Speaker 1: or the UK or both, and that is an essential element.
Speaker 1: The other one of the other critical pieces is not
Speaker 1: just waving immunity, but agreeing where you can be sued.
Speaker 1: So if Russia says I don't wave immunity, we're back
Speaker 1: to a world that we haven't seen in sovereign debt
Speaker 1: since the fifties, well before the Foreign Sovereign Munities Act
Speaker 1: and the State Immunities Act, where the sovereign is a
Speaker 1: beneficiary of absolute immunity. It's what sovereigns are. They do
Speaker 1: what they want when they want, they pay what they
Speaker 1: want when they want to pay it. And that's the
Speaker 1: position that Russia has staked out for itself. Why was
Speaker 1: there I mean, we had we talked about Russian debt,
Speaker 1: I think back March share early on after the invasion,
Speaker 1: But you know, we talked about the end of the
Speaker 1: fact that there weren't many covenants, that there were all
Speaker 1: kinds of things buried in the language that seemed to
Speaker 1: be sort of favorable for Russia all those years, even
Speaker 1: after the invasion of Crimea I think, which was in fourteen.
Speaker 1: Why was there still so much willingness between that period
Speaker 1: when it was clear that the country would be willing
Speaker 1: to be a military aggressor and engaging activities that people
Speaker 1: would associate with a prize state. Why up and for
Speaker 1: basically another eight years after that did there and then
Speaker 1: the conditions that you just mentioned about not waving sovereign immunity.
Speaker 1: Why was there so much willingness for all those years
Speaker 1: on the part of buyers to continue buying Russian bonds?
Speaker 1: In your view, because Russia was a great payer. They
Speaker 1: kept paying throughout even after the sanctions imposed, you know,
Speaker 1: post Crimea in and they showed no indication of not
Speaker 1: intending to honor their obligations. So Russia looked like a
Speaker 1: like like a strong credit. And in fact, Russia even
Speaker 1: at the beginning of this of this crisis, post January February,
Speaker 1: Russia insisted and did make payments. So Russia really in
Speaker 1: it appears to all intents to intend to be a
Speaker 1: responsible debtor. Right now, it's it's um because of sanctions,
Speaker 1: it's foreclosed from doing that. I want to go back
Speaker 1: to something you said about Sri Lanka and you're like, Okay,
Speaker 1: there's a default, but the world comes together and all
Speaker 1: these international institutions that I'm at, the G seven, the
Speaker 1: Asian Development Bank, etcetera. And they try to help Sri
Speaker 1: Lanka out. It's not Sri Lanka's fault that they're in
Speaker 1: the stress. And when you said that, I clearly got
Speaker 1: the impression that you think that this is a bad system,
Speaker 1: or that this sort of generosity towards Sri Lanka in
Speaker 1: the wake of a default is not productive or misplaced.
Speaker 1: Can you talk about your view a little bit more
Speaker 1: on that. I mean, it's been a pretty tough two years.
Speaker 1: There was a pandemic, then there's been surging inflation. Why
Speaker 1: shouldn't all these public or official institutions take the view
Speaker 1: that Sri Lanka got into a bad place and they
Speaker 1: need help. If we go back to basics. And I
Speaker 1: wrote a little piece about this that I called Unsafe
Speaker 1: at any Price, comparing sovereign debt to the corvet sovereign debt.
Speaker 1: The idea of a sovereign borrowing and a current see
Speaker 1: that isn't its own, is fundamentally flawed. It's a really
Speaker 1: bad idea. But the entire structure of the sovereign dett
Speaker 1: industry is you know, it supports the idea that it's
Speaker 1: that it's not a bad idea. But if you take
Speaker 1: the case of Sri Lanka, and Sri Lanka had borrowed
Speaker 1: in its own currency rather than in the dollar or
Speaker 1: in the euro, it wouldn't have a problem because it
Speaker 1: could just print its own currency. Now, the response to that,
Speaker 1: and we get this all the time, people saying, well,
Speaker 1: but they couldn't borrow if they couldn't borrow that much
Speaker 1: money unless they agree to borrow dollars, And isn't that
Speaker 1: just the point? So would you argue therefore, I mean,
Speaker 1: you know, again, I'm really struck by this idea that
Speaker 1: flows often start because retail investors see the adds in
Speaker 1: the newspapers that really this whole system of a sort
Speaker 1: of like public financialized sovereign debt market particular for MS,
Speaker 1: sort of flawed the core, completely completely flawed, completely rotten.
Speaker 1: If it were if 're up to me and I
Speaker 1: had my magic wand I would repeal the Sovereign Immunities Act,
Speaker 1: and I'd repeal the State Immunities Act, and I would
Speaker 1: I would go back to the principle of absolute immunity,
Speaker 1: because if you're if you're looking at absolute immunity, and
Speaker 1: maybe the Russians have the right idea and perhaps not
Speaker 1: borrowing in occurrency not their own, but the right idea,
Speaker 1: and saying you're looking at if you look at me
Speaker 1: as a sovereign, I'll pay you what I want when
Speaker 1: I want, and you have to trust me. And that
Speaker 1: would put investors on a very different footing. It wouldn't
Speaker 1: make the underwinding community at all happy about it because
Speaker 1: it would mean that they couldn't sell as many bonds.
Speaker 1: But wouldn't that be sagatary. It definitely sounds like you'd
Speaker 1: probably get less boom bust. It would be harder to
Speaker 1: sell debt probably during the boom, I guess, but you
Speaker 1: don't get these huge swings and flows. I think that's
Speaker 1: exactly right. Could you talk a little bit about E
Speaker 1: s G and how that relates to sovereign debt, because
Speaker 1: you know, we're talking about the Russian bonds and one
Speaker 1: of the things that stands out is that if you
Speaker 1: read the risk factors, it's just a litany of bad
Speaker 1: stuff that Putin has done. Basically saying that he's done
Speaker 1: a bunch of bad stuff, there might be sanctions, he
Speaker 1: could do more bad stuff, And yet you had big
Speaker 1: investors who ostensibly care about E s G and social
Speaker 1: values who bought a lot of the debt. And at
Speaker 1: the same time, now you're seeing a lot of people
Speaker 1: talk about E s G as a sort of political consideration.
Speaker 1: So do you want to lend to Russia if it's
Speaker 1: considered an enemy of the United States and things like that.
Speaker 1: I think the short answer to that is no. I
Speaker 1: think a lot of people are not going to a
Speaker 1: lot of people will be taking E s G into account,
Speaker 1: and there will be less of a market for certain debtors.
Speaker 1: But it's um if if you're gonna cast the E
Speaker 1: s G net over developing countries, generally you're gonna run
Speaker 1: into trouble because we're talking about countries that you know
Speaker 1: that on average, and it's unfair to to malign people
Speaker 1: as an average, governance is poor and in many cases
Speaker 1: uh corruption is rampant. And at the same time, countries
Speaker 1: are producer of natural resources that are desperately needed by
Speaker 1: Western industrial countries. So people who will need to turn
Speaker 1: a blind eye to all those factors because of the
Speaker 1: geopolitics and the geo economics. So do you think we
Speaker 1: will see I mean, okay, so so far in this cycle,
Speaker 1: what have we seening? We've seen Sri Lanka, it has defaulted,
Speaker 1: anyone else? Uh, Lebanon? Do you expect to see several
Speaker 1: more coming? I mean, if you say this is you know,
Speaker 1: I think in your first entry he said a perfect storm,
Speaker 1: which is a phrase and Tracy and I know in
Speaker 1: every day so every episode these days, whatever it is,
Speaker 1: it's in a perfect storm. The dollars in a perfect
Speaker 1: storm text docs is a perfect it's the most But
Speaker 1: what there are a lot of perfect storms happening right now.
Speaker 1: I mean, would you expect to see this just the
Speaker 1: absolute number of defaults pick up significantly? I would expect
Speaker 1: it to And I think I think it's actually what
Speaker 1: you're describing is actually one big perfect storm because all
Speaker 1: these things are related, and it's because we haven't seen
Speaker 1: this kind of a boom and a bust in financial
Speaker 1: markets where this kind of a bust in what about
Speaker 1: fifteen years, uh, and maybe on the tech side over
Speaker 1: twenty years. So it's there are so many elements that
Speaker 1: conspire against sovereign debtors continuing to be able to pay
Speaker 1: what they are. So you touched on this a number
Speaker 1: of times. What would you expect a bust of a
Speaker 1: significant scale to lead to some sort of significant change
Speaker 1: in the way emerging market debt markets actually work? I mean,
Speaker 1: would you see the balance of power shift more to
Speaker 1: the credit DERs away from the issuers. Would you expect
Speaker 1: less foreign currency debt to be issued in general and
Speaker 1: things like that, or do we just have a default
Speaker 1: cycle and then we just go back to the way
Speaker 1: it always has been or the way it's been for
Speaker 1: the past couple of decades. Um. I don't expect there
Speaker 1: to be a lot of fundamental change. I think we'll
Speaker 1: get through this period. And the the other important pieces
Speaker 1: that the absolute amount of developing country debt is rather
Speaker 1: small in international financial terms. It's not big enough two
Speaker 1: in and of itself cause a problem except for the
Speaker 1: debtors themselves, who get trapped in a cycle that takes
Speaker 1: many years to to work through. But what is somewhat
Speaker 1: different in this cycle, and we saw it two years
Speaker 1: ago in the case of Argentina in their most recent restructuring,
Speaker 1: is that the bond contracts are so weak so creditors
Speaker 1: realize that they don't have a lot of leverage, and
Speaker 1: because they don't have a lot of leverage, they agree
Speaker 1: to deals that are that are you know, much much
Speaker 1: better for the debtor and much worse for creditors. And
Speaker 1: I don't see that changing. I think if, if, if
Speaker 1: investors study the details, they'll realize that these are not
Speaker 1: The bond contract isn't a safe place to place your bet.
Speaker 1: History being what it is and markets being what they are,
Speaker 1: I don't think we're going to really see much change.
Speaker 1: So you mentioned Argentina, and you know that was an
Speaker 1: enormously profitable trade for Elliott famously, and you just spoke
Speaker 1: about the importance of actually looking at contracts, looking at
Speaker 1: the bond documentation and sifting through it. What was the
Speaker 1: smartest move that you pulled at Elliott when it came
Speaker 1: to Argentina. What were you most proud of? And please
Speaker 1: be as technical as you want, because I have some
Speaker 1: specific things in mind, but i'd love to hear what
Speaker 1: you're thinking. I think that it's it's easy to to
Speaker 1: be grandiose and take credit for the Argentine re structuring,
Speaker 1: but in fact, many creditors work together in that and
Speaker 1: I think that one of the things that I'm most
Speaker 1: pleased with is the the ability of the creditor group
Speaker 1: to really stick together and be thoughtful about what was
Speaker 1: possible in terms of Argentine restructuring, and that collegiality persisted
Speaker 1: to the very end through the through the restructuring and
Speaker 1: ultimately resulting and restructuring that was extremely good for Argentina
Speaker 1: and extremely good for for the creditors that remain standing.
Speaker 1: But a lot of creditors, of course, we're peeled off
Speaker 1: along the way by the Kirshner's aggressive tactics and populism.
Speaker 1: But I think that the idea of collective action is
Speaker 1: something that I think about a lot in terms of
Speaker 1: restructuring is generally and emerging mark restructurings, uh, you know,
Speaker 1: in particular, and you see you see that ability to
Speaker 1: act collectively fading the diversity of creditors in Argentina, I
Speaker 1: think produced a in most recent restructuring produced a very
Speaker 1: bad result with you know, massive debt forgiveness that was
Speaker 1: completely uncalled for because creditors really couldn't agree amongst themselves.
Speaker 1: And this is this is what I call the just
Speaker 1: say no moment that when you're faced with a situation
Speaker 1: in which it's you have no leverage and the debtor
Speaker 1: is being aggressive and obstructive and obstreperous, which is defines Argentina.
Speaker 1: Sometimes you just have to back away from the table.
Speaker 1: But that is the most difficult thing to do, because
Speaker 1: there is a propensity on the part of participants in
Speaker 1: any situation to want to stick with it and remain
Speaker 1: at the table, and sometimes you just can't. But that's
Speaker 1: the that's the one element that if creditors could really
Speaker 1: understand that, embrace it and resort to it, it would
Speaker 1: be much better. Sorry, I have a really basic question,
Speaker 1: but you know, if a country defaults in the market,
Speaker 1: they're supposed to be penalized in some way for that.
Speaker 1: In theory, people are supposed to say, well, they're not
Speaker 1: a reliable borrower and so we're not going to lend
Speaker 1: to them again. If you're an investor or a creditor
Speaker 1: and you back away from a negotiation or you don't
Speaker 1: do something that the sovereign issuer would have liked you
Speaker 1: to do, do you get shunned in the future from
Speaker 1: debt sales or do you get penalized in any way?
Speaker 1: I think you do. You do get shunned. I think
Speaker 1: Argentina is currently being shunned, will be shunned. But I
Speaker 1: think it takes a long time for markets to develop
Speaker 1: that kind of muscle memory. Uh And in the case
Speaker 1: of Argentina, it's taken decades and decades for people to
Speaker 1: realize that fundamentally, Argentina is not a reliable counterparty. I
Speaker 1: think for most other countries that don't have that kind
Speaker 1: of history of aggressive defaults and repeated defaults, investors are
Speaker 1: willing to give new governments a chance. I think the
Speaker 1: question is going to be whether, in the case of Argentina,
Speaker 1: when and if there is a change of regime, markets
Speaker 1: will give that new regime a chance. The the Mocker
Speaker 1: administration is perhaps one reason that investors shouldn't jump in
Speaker 1: too quickly, because Mackrie was there for a very short
Speaker 1: period of time. He did restructure the debt, he did
Speaker 1: bring Argentina back to capital markets, but as soon as
Speaker 1: he was gone, Argentina was back in the tank. But
Speaker 1: what about investors. Do they get penalized as well if
Speaker 1: you don't, you know, do what a government wants, or
Speaker 1: if you walk away from the negotiating table. We haven't
Speaker 1: seen that happen. How do you know in that moment
Speaker 1: is there that it's time to walk away? I mean,
Speaker 1: I assume this is what separates the elites from the right,
Speaker 1: But what is it. How do you know in that
Speaker 1: moment is there to think you just say that in
Speaker 1: the case of Argentina, asked, The discussion went on. It
Speaker 1: moved to Argentina saying we're gonna pay what we're gonna pay,
Speaker 1: and creditors then, at the behest of some of us
Speaker 1: who were encouraging a restructuring of the bond contract, some
Speaker 1: creditors said, well, if you're gonna give us a fifty haircut, uh,
Speaker 1: even though you may not need it, and even though
Speaker 1: you haven't put forth a fiscal plan that describes your
Speaker 1: capacity to pay, if you're going to do all those things,
Speaker 1: at least give us new bond terms that are going
Speaker 1: to be create what I call a super bond, a
Speaker 1: bond that is actually enforceable and would be senior to
Speaker 1: any other kinds of debt. And what Argentina said flat
Speaker 1: out was absolutely not, We're gonna be the same garbage
Speaker 1: covenants in the same garbage paper that we're currently sitting
Speaker 1: at this table talking about that would have been a
Speaker 1: moment to say, we can't we can't live this way.
Speaker 1: We can't live with a default, a massive haircut, and
Speaker 1: a bond contract that makes it completely optional whether you
Speaker 1: ever pay us another dime again, can you explain what
Speaker 1: you mean by their structuring was great for Argentina too? Well?
Speaker 1: I think it was great for Argentina in the sense
Speaker 1: that Argentina now has a much more manageable level of debt.
Speaker 1: It's got a bond contract that really does make repayment
Speaker 1: an option it makes. It can pay or not pay
Speaker 1: depending upon its view of its financial situation and its
Speaker 1: market access. So I think that it's um Argentina is
Speaker 1: for the moment in the catbird seat, except that it
Speaker 1: doesn't have the kind of market access it needs. It
Speaker 1: doesn't have the kind of credibility it needs. And one
Speaker 1: example of that is the Vakamrita. So this huge formation
Speaker 1: of oil and gas, it's shaped like it's called Vahamwara,
Speaker 1: and i've I've fractured the Spanish. But because it looks
Speaker 1: from the sky like a dead cow um and it's
Speaker 1: a it's a massive reserve of hydrocarbons that should have
Speaker 1: been exploited, you know, through through drilling, through pipelines, through
Speaker 1: exports over the last many decades. But because of Argentina
Speaker 1: is fractious politics, it hasn't been. So you have a
Speaker 1: you know, a country as as ever in the case
Speaker 1: of Argentina that ought to be incredibly wealthy that isn't
Speaker 1: because of its own peculiar psychology. I just remembered. I mean,
Speaker 1: they did issue that hundred year bond, remember which which
Speaker 1: is now do we have a quote on where is
Speaker 1: that trading? Yeah? Well, so this was gonna be my
Speaker 1: next question. So it's trading terribly at the moment um,
Speaker 1: largely because of duration. You would expect to bond at
Speaker 1: a hundred year maturity issued at a very low interest
Speaker 1: rate to have like a high duration risk, and as
Speaker 1: rates go up, it's going to get crushed. How much
Speaker 1: are the pure interest rate dynamics, you know, setting aside
Speaker 1: credit fundamentals, but just the dynamics of interest rates actually
Speaker 1: going up and increasing payments for emerging markets? How much
Speaker 1: is that a problem? It's always it's always a problem.
Speaker 1: That's I think you described that Tracy at the very
Speaker 1: beginning of the hour as prices for a new debt
Speaker 1: go up, the ability to refinance goes down, and that's
Speaker 1: where countries run into trouble. But the hundred of year,
Speaker 1: maybe we should think about hundred of your bonds as
Speaker 1: a bellweather. You know, it's a bad sign when somebody
Speaker 1: is able to borrow, especially a country that doesn't have
Speaker 1: a hundred year history of borrowing can borrow for a
Speaker 1: hundred years. It's just that's just madness. So one of
Speaker 1: the things you're known for at Elliott is basically I'm
Speaker 1: thinking how to put this but creative, creative solutions to
Speaker 1: pursuing payouts. And I remember, for instance, you brought racketeering
Speaker 1: charges against a French bank. How do you and of
Speaker 1: course there was the famous story of seizing the Argentine
Speaker 1: naval ship and things like that, But how do you
Speaker 1: actually come up with those sorts of ideas for pursuing payouts?
Speaker 1: Because some of them are quite creative in the sense
Speaker 1: that not everyone well no one had tried them before.
Speaker 1: Most countries pay with they oh and whether they pay
Speaker 1: it early on or later on, they have a willingness
Speaker 1: to actually make good on their obligations. So we're talking
Speaker 1: about the hardest cases, making the worst law and so
Speaker 1: the very few countries that have a kind of cultural
Speaker 1: indifference to making good on their obligations create a lot
Speaker 1: of need and opportunity for creditors. And so that's where
Speaker 1: the creativity comes in. When you when you have a
Speaker 1: country that really doesn't want to pay what it owes,
Speaker 1: you're in a position where you just have to keep
Speaker 1: getting their attention. And the Argentine saga, which and again
Speaker 1: it wasn't just Elliott Management, it was many firms that
Speaker 1: were involved in in that over long period of time.
Speaker 1: The goal was always to get Argentina to the table.
Speaker 1: Because even though many creative attachments and arrests you mentioned
Speaker 1: the Libertad lanes were arrested in France. Today the plane
Speaker 1: of the President of Congo is under arrest and is
Speaker 1: about to be auctioned. Uh. Sometimes people have attached oil cargoes.
Speaker 1: You have all all sorts of creative avenues, but debt
Speaker 1: cases don't get resolved through attachments and through execution against assets.
Speaker 1: They always get resolved through settlement. So the goal is
Speaker 1: always to get the attention of the debtor, but not
Speaker 1: push them away. Unfortunately, sometimes creditors do things that do
Speaker 1: end up pushing them away, and then the only opportunity
Speaker 1: is really regime change. And that is what happened in
Speaker 1: Argentina while Christina Kirchener was in charge. It had become
Speaker 1: impossible because she loved calling creditors vultures, and she loved
Speaker 1: her stature as coman who was standing up against them. Well,
Speaker 1: just on this note, I mean, is there anything that
Speaker 1: you regret doing or something that you would have done
Speaker 1: differently with the benefit of hindsight. As an investor, you
Speaker 1: always regret not buying more of the things that did well.
Speaker 1: I want to actually go back to, uh, the discussion
Speaker 1: of the novelty that is China's role as the sort
Speaker 1: of very senior creditor, you know when you when when I,
Speaker 1: you know, the One Belt, One Road initiative first sort
Speaker 1: of came on my radar or something I thought about
Speaker 1: it seemed like, well, this is like, you know, a
Speaker 1: strategic act of foreign policy. So it's like, yes, you invest,
Speaker 1: you know, China invest in infrastructure in numerous countries, but
Speaker 1: you know, for part like foreign policy influence and to
Speaker 1: build up a trading partner and so forth. Is it
Speaker 1: surprising that instead it's taken such a hard line simply
Speaker 1: on the question of being paid back, because if you
Speaker 1: do think, like, okay, is this about or I would
Speaker 1: have thought that if this is about extending China's foreign
Speaker 1: policy reach or extending it's just sort of deepening its
Speaker 1: relationships with countries all over the world, across Asia, across Africa,
Speaker 1: that it would have been more conciliatory on the restructuring
Speaker 1: side to maintain those relationships. Uh um, I agree with
Speaker 1: you that that that would make sense for China if
Speaker 1: it wants to be part of um, you know, our
Speaker 1: current Western liberal tradition and system. But China gives no
Speaker 1: indication of wanting part of that system. China has, I think,
Speaker 1: a very different view, has a different system. It wants
Speaker 1: to go its own way, and if it can disadvantage
Speaker 1: and crush other creditors in the course of restructurings, that
Speaker 1: appears to be what it wants to do. I think
Speaker 1: if we really can't talk enough about China and the
Speaker 1: role of China in developing economies on on every level,
Speaker 1: from the perspective of controlling natural horses, from the perspective
Speaker 1: of being a direct foreign investor, from the perspective of
Speaker 1: being a lender, China will be the dominant the dominant
Speaker 1: question for the next several decades unless things change, and
Speaker 1: it's unclear what could cause anything to change. Because China
Speaker 1: still has the ability to pump out huge amounts of
Speaker 1: money and people to develop projects around the world. Should
Speaker 1: governments in the US and Europe be more proactive or
Speaker 1: be thinking more aggressively than they are about not seeding
Speaker 1: all of this influence in various developing markets to China.
Speaker 1: I think there's no question that that's the case. But
Speaker 1: it's uh, can you imagine Western governments being having a
Speaker 1: cohesive and coherent policy on any on any topic, let
Speaker 1: alone a African development policy. So so let's just take
Speaker 1: the simplest possible question. You're you're a You're the G seven,
Speaker 1: and you know that China is the big dog, and
Speaker 1: you know they've invested in lent huge amounts of money.
Speaker 1: You just want to see the contracts. You just want
Speaker 1: some transparency. So Western governments should be insisting as a
Speaker 1: condition of any restructuring that involves sovereign debt, whether it's
Speaker 1: private sector or public sector, that that all the creditors
Speaker 1: come to the table and and put their put out
Speaker 1: their cards and show what they've got and that would
Speaker 1: seem to be a very easy position to coalesce around.
Speaker 1: But will it be just on the topic of China,
Speaker 1: And this is something else that's come up recently in
Speaker 1: a different way, But there is a sense out there
Speaker 1: that some of China's lending has been exploitative in one
Speaker 1: way or another. So we haven't seen the contracts exactly,
Speaker 1: but there's a suspicion that, for instance, a country might
Speaker 1: be giving up some portion of sovereign independence in order
Speaker 1: to get money from China to build a massive port
Speaker 1: something like that. And we've also seen some noises around um,
Speaker 1: you know, on the other side of the world, Haiti
Speaker 1: and the idea of reparations. And you've already mentioned the
Speaker 1: V word, which is vulture funds, and when it comes
Speaker 1: to distress debt investors, there is a sense that they
Speaker 1: can be exploitative in some way and they're ringing money
Speaker 1: out of poor nations. How would you respond to that
Speaker 1: criticism and how are you thinking around the idea of
Speaker 1: reparations for sovereign debt injustices in general? The word that
Speaker 1: comes to mind when we embark on this kind of
Speaker 1: conversation is the C word, which is corruption and I don't.
Speaker 1: I don't think there has ever been a a sovereign
Speaker 1: debt crisis or sovereign debt problems where corruption isn't an
Speaker 1: underlying issue. And this is another place where Western governments
Speaker 1: could take a very insistent role, a place where I
Speaker 1: m F could take a very insistent role and and
Speaker 1: focus on corruption and not just the existence of it
Speaker 1: or the past effects of it, but the possibility of
Speaker 1: recovering ill gotten gains. I wonder, I'm thinking out loud now,
Speaker 1: I wonder whether what's happening with sanctions in the case
Speaker 1: of Russia might be a watershed because Western governments have
Speaker 1: become very willing to sanction the vast numbers of individuals
Speaker 1: around Vladimir Putin go after their their bank accounts, their companies,
Speaker 1: notably their yachts and their planes. And at this point,
Speaker 1: at just point, at this point, most have just been ceased,
Speaker 1: they haven't been confiscated. But I've never been involved in
Speaker 1: a in a sovereign debt situation in which the if
Speaker 1: you were really thinking about the balance sheet of a country,
Speaker 1: corruption and still gotten gains shouldn't have been an issue.
Speaker 1: And just if we just imagine a world in which
Speaker 1: creditors became in a way private attorneys general, and we're
Speaker 1: licensed to go after people that have been milking a
Speaker 1: country for a decade after decade, which unfortunately is all
Speaker 1: too prevalent. You just have to look at transparency international
Speaker 1: rankings to understand that whether the whole dynamic wouldn't change
Speaker 1: in a very positive way. Just to push this a
Speaker 1: little further in theory, if you have a country that
Speaker 1: has a highly corrupt government, you know, and then you
Speaker 1: have a regime change, I mean, I guess part of
Speaker 1: the argument seems to me that, well, the citizens of
Speaker 1: the country shouldn't be like punished in perpetuity for years
Speaker 1: or future governments shouldn't have to make this decision about well,
Speaker 1: are we going to pay back the debt of the
Speaker 1: press corrupt government, or are we going to feed our people?
Speaker 1: Are we gonna build hospitals? Are we going to build infrastructure?
Speaker 1: And it seems like you still have this like problem
Speaker 1: where okay, even if you were to root out this
Speaker 1: corruption that the citizens who were just they're often probably
Speaker 1: exploited themselves in many cases, are then still paying the
Speaker 1: price for made. This gets to the odious debt conversation
Speaker 1: that we've had around a rock and others, but are
Speaker 1: still paying the price regardless of their culpability. It's bad.
Speaker 1: Government is is unfortunately a huge, huge problem, and I'm
Speaker 1: I'm completely sympathetic to the idea that people that live
Speaker 1: in these in these horribly corrupt and opaque regimes are
Speaker 1: are punished. But how do you break the cycle. It
Speaker 1: seems like, getting back to your other point that the
Speaker 1: entire system of private investment in sovereign debt, particularly sovereign
Speaker 1: hard currency debt, is just deeply flawed, and he gets
Speaker 1: back to this idea, it's like, why do we even
Speaker 1: have all of these private creditors out there in the
Speaker 1: first place, or such a large number of private creditors
Speaker 1: at all in the role of sovereign finance. Well, investors
Speaker 1: are are fundamentally optimistic. And there's a whole other level
Speaker 1: of investment that we haven't talked about, which is and
Speaker 1: you has mentioned this show, which is the foreign direct investment.
Speaker 1: And you have recent cases in particularly involving India, world's
Speaker 1: largest democracy, which when it's faced with arbitration awards because
Speaker 1: it's confiscated property, decides to vilify investors and avoid payment.
Speaker 1: So it's Uh, it applies not just to debt but
Speaker 1: direct foreign direct investment. And this fundamental optimism on the
Speaker 1: part of investors because we are you know, every every
Speaker 1: time you lend money or invest money, you're being optimistic
Speaker 1: about your your not just your own process and your
Speaker 1: own analysis, but the capacity and willingness of your investee
Speaker 1: and your or your bar word to on their obligations.
Speaker 1: But to the point about reparations, this is it's it's
Speaker 1: an issue that's on the table. It's obviously being discussed,
Speaker 1: but I think it can't be discussed in a vacuum,
Speaker 1: and it really has to be discussed in the context.
Speaker 1: And you look at a country like Haiti where elites
Speaker 1: have really destroyed that country by milking it consistently over
Speaker 1: decade after decade after decade. How can you talk about
Speaker 1: reparations without going after the the elites they have stolen
Speaker 1: the country blind? This is how you get there. I'm
Speaker 1: not quite sure, but I know that you have to
Speaker 1: get there to have a fair and sensible conversation about
Speaker 1: all those questions. All right, Jay, it's been so great
Speaker 1: having you on the show. Thank you so much. That's
Speaker 1: Jane Newman, formerly of Elliott and the author of the
Speaker 1: novel under Money in book Stories. Now, Je, thank you
Speaker 1: so much. That was great, Thank you, thank you, Joe.
Speaker 1: That was a really interesting conversation, I thought, and one
Speaker 1: of the things that stands out to me, and I
Speaker 1: know the benefit of hindsight is of course, but the
Speaker 1: Argentine hundred year bond just a side whenever you see
Speaker 1: a country without a hundred year history of issuing debt,
Speaker 1: issuing for a century and that supporting it was a
Speaker 1: really crazy time. I mean, I got, like, you know,
Speaker 1: there was also the Austrian one, but like, okay, I
Speaker 1: understood that's just a normal long direction. As a half Austrian,
Speaker 1: we should leave Austria alone, you know. But yeah, there
Speaker 1: were there's sort of two famous century bonds. I was also,
Speaker 1: I mean, there were a lot of interesting things. The
Speaker 1: the unique novelty well, actually, you know what I was
Speaker 1: very struck by is jay is point that maybe this
Speaker 1: whole system of borrowing hard currency debt is flawed. And
Speaker 1: you know, of course we've had the MMT conversations and
Speaker 1: all the people saying, well, you know the first thing
Speaker 1: that these countries should do is stop borrowing in dollars,
Speaker 1: stop borrowing in currencies that they can't print themselves, whether
Speaker 1: they be dollars or euros, that would at least get
Speaker 1: somewhere some progress. So it's interesting to hear a a
Speaker 1: veteran of the actual industry kind of say the same
Speaker 1: thing from the other perspective, and you managed to bring
Speaker 1: it to m M. Didn't hear our? Right? Shall we
Speaker 1: leave it there? Let's leave it there? Okay. This has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why Isn't All? You can follow me on
Speaker 1: Twitter at the Stalwart. Follow our guest on Twitter, Jane Newman.
Speaker 1: He's at Jane Newman. Follow our producer Carmen Rodriguez at
Speaker 1: Carmen Arman. Followed the Bloomberg head of podcast Brancesca Leav
Speaker 1: at Francesca Today, and check out all of our podcasts
Speaker 1: at Bloomberg under the handle head Podcasts. Thanks for listening.