WEBVTT - Jay Newman on the Coming Crisis for Emerging Markets 0:00:10.720 --> 0:00:14.520 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:14.600 --> 0:00:17.919 I'm Tracy Alloway and I'm Joe. Joe. It's been a 0:00:17.920 --> 0:00:21.599 while since we talked emerging markets. It really has been, 0:00:21.800 --> 0:00:25.120 and probably to our detriment, because there is a lot 0:00:25.200 --> 0:00:30.440 going on with the commodities boom, the US dollar boom, 0:00:30.640 --> 0:00:35.519 the tightening cycle, inflation, there's the distress in Sri Lanka 0:00:35.600 --> 0:00:38.120 among others, So there's a lot together. There's a lot 0:00:38.200 --> 0:00:40.400 that's been going on, right, And every time you see 0:00:40.400 --> 0:00:44.120 the US raise interest rates, you generally see some pain 0:00:44.560 --> 0:00:48.000 in emerging markets because the dollar goes up and the 0:00:48.120 --> 0:00:51.680 foreign currency payments that governments who have borrowed in the 0:00:51.720 --> 0:00:54.400 dollar have to pay those go up. And it just 0:00:54.480 --> 0:00:56.960 feels like at the moment, with everything that's going on. 0:00:57.480 --> 0:01:00.080 And you mentioned the commodities boom, Normally a commodity the 0:01:00.160 --> 0:01:02.960 spoon would be great for emerging markets, but this time 0:01:03.080 --> 0:01:06.200 it seems to come with a lot of imported inflation. Yes, 0:01:06.680 --> 0:01:09.120 so this time it seems like a really toxic mix 0:01:09.160 --> 0:01:12.840 for m and like acute shortages. So you could have 0:01:12.920 --> 0:01:15.080 a commodities boom and it's like, Okay, there are a 0:01:15.080 --> 0:01:18.959 bunch of commodity producing countries seeing big, you know, cash 0:01:19.080 --> 0:01:23.240 increase in their imports or their their cash flows right now. 0:01:23.440 --> 0:01:25.840 But you know, if you're a country that doesn't have 0:01:25.920 --> 0:01:29.040 much domestic food, or country that doesn't have much domestic 0:01:29.040 --> 0:01:33.560 wheat specifically, and there's a grain shortage, then you're it's 0:01:33.600 --> 0:01:38.080 is a very distressing time. Yeah, very toxic mix politically 0:01:38.120 --> 0:01:40.360 as well. And of course the other big thing that's 0:01:40.400 --> 0:01:43.960 going on is Russia, and we've had lots of people 0:01:44.240 --> 0:01:48.560 expecting Russia to default on its bonds. That seems almost 0:01:48.560 --> 0:01:51.240 certain to happen now given that the U. S. Treasury 0:01:51.520 --> 0:01:55.520 has imposed even more restrictions on trading in the secondary 0:01:55.560 --> 0:01:58.720 market of the debt. They've also stopped investors from accepting 0:01:59.120 --> 0:02:02.680 bond payments from Russia. So it seems like a default 0:02:02.720 --> 0:02:05.200 is definitely going to happen, which means, of course that 0:02:05.240 --> 0:02:08.520 we need to talk about all of this means all right, 0:02:09.000 --> 0:02:11.280 without further ado, I am very pleased to say we 0:02:11.320 --> 0:02:13.960 really have the perfect guest to discuss. We are going 0:02:14.000 --> 0:02:17.000 to be speaking with Jane Newman. He is a former 0:02:17.160 --> 0:02:23.000 portfolio manager at Elliott, very instrumental in Elliott's pursuit of Argentina. 0:02:23.040 --> 0:02:25.760 And all the drama that happened there. He's a sovereign 0:02:25.800 --> 0:02:29.880 debt specialist in general now turned novelist and his book 0:02:30.080 --> 0:02:33.600 is called Under Money. That's out now. Jay, welcome so 0:02:33.680 --> 0:02:36.480 much to the show. Tracy, thank you, and thank you, Joe, 0:02:36.520 --> 0:02:40.560 thanks for coming up. So maybe, given your decades of 0:02:40.600 --> 0:02:43.040 experience and EM, maybe just to begin with, we could 0:02:43.080 --> 0:02:46.080 ask the big question, how bad is it right now 0:02:46.120 --> 0:02:52.079 for EM and what is the most striking historical analogy 0:02:52.160 --> 0:02:54.359 or parallel that you would compare it to. I think 0:02:54.360 --> 0:02:58.640 it's almost the perfect storm for EM. And the only 0:02:58.680 --> 0:03:02.400 real comparison I can draw is from the very beginning 0:03:02.520 --> 0:03:06.959 of Third World debt crises, which is the eighties. Um 0:03:07.000 --> 0:03:10.480 the Foreign Sovereign Immunities Act was passed in nineteen seventy six, 0:03:10.560 --> 0:03:14.200 the Stateiumunities Act in England nineteen seventy seven, and then 0:03:14.240 --> 0:03:17.560 we saw a huge, huge volume of lending. It's the 0:03:18.040 --> 0:03:22.400 time when Walter Riston famously said to excuse lending to 0:03:22.480 --> 0:03:26.360 development countries, he said, countries don't go bankrupt, which is 0:03:26.639 --> 0:03:30.240 completely accurate and totally useless if you're a creditor. But 0:03:30.320 --> 0:03:33.080 what we saw there was a period in which something 0:03:33.120 --> 0:03:37.400 like twenty five countries defaulted. UH. And what years this 0:03:37.520 --> 0:03:40.160 was in The faults started in the late seventies, but 0:03:40.240 --> 0:03:43.480 they extended into the eighties. UH. And they weren't resolved 0:03:43.560 --> 0:03:47.040 really into the nineties. UH. Of course the case of Argentina, 0:03:47.080 --> 0:03:50.720 which went on even longer. UM. But we're talking about 0:03:50.720 --> 0:03:55.160 a period that could be very, very stressful and distressing 0:03:55.280 --> 0:03:59.800 for developing country borrowers. Just going back, actually before we 0:04:00.120 --> 0:04:02.920 get too much on the present. Why did countries default? 0:04:03.680 --> 0:04:06.800 They default because markets closed to them, And that's what 0:04:06.920 --> 0:04:11.120 typically happens. The initial defaults in Poland and in Mexico 0:04:11.680 --> 0:04:15.320 made lenders very nervous, and when it came time to 0:04:15.400 --> 0:04:18.520 roll over the debt, there was there were no takers. 0:04:18.560 --> 0:04:22.120 That's what's happening today. I mean, it's it's uh, it's 0:04:22.160 --> 0:04:25.640 almost an inedible process when when things are good and 0:04:25.680 --> 0:04:29.760 money is easy, people pile in and the underwriters find, 0:04:29.839 --> 0:04:32.120 you know, plenty of buyers, but all of a sudden, 0:04:32.520 --> 0:04:36.800 when one country defaults. Let's take Lebanon, Let's take Sri Lanka, 0:04:36.800 --> 0:04:40.800 which you mentioned, Everyone says, WHOA, what about country X 0:04:40.839 --> 0:04:44.320 and country wine, country Z, And then they become nervous 0:04:44.360 --> 0:04:48.040 and then the debt can't get rolled, is it inevitable 0:04:48.120 --> 0:04:51.320 in the current situation. The investors start pushing back, and 0:04:51.400 --> 0:04:53.240 I mean the reason I ask is because how many 0:04:53.279 --> 0:04:56.080 times has Argentina default it? Now? And someone out there 0:04:56.160 --> 0:04:59.159 is always buying the new bonds that it issues. It 0:04:59.240 --> 0:05:03.400 feels like people investors learn their lesson for you know, 0:05:03.520 --> 0:05:06.640 maybe a month, and then the next year they forget 0:05:06.680 --> 0:05:10.280 it again and people are buying em indiscriminately. It's it's 0:05:12.480 --> 0:05:16.760 um It is a complicated ecosystem, and it's it's rotation 0:05:16.880 --> 0:05:19.440 because what happens in the first instances that the buyers 0:05:20.120 --> 0:05:24.280 tend be real money buyers, retail investors through mutual funds 0:05:24.320 --> 0:05:28.480 that are responding to advertisements. You've you've seen those ads 0:05:28.520 --> 0:05:31.359 in the in the paper which show past performance and 0:05:31.400 --> 0:05:34.599 they and they always show the best performing funds, and 0:05:34.760 --> 0:05:38.160 periodically those are emerging market funds, and that's when sales 0:05:38.200 --> 0:05:42.680 pick up and the the the mutual fund investor and 0:05:42.760 --> 0:05:47.479 buyer is driven by indices. So there's always a buyer. 0:05:47.560 --> 0:05:50.440 If the country's in the index, whether it's Argentina or Russia, 0:05:50.920 --> 0:05:54.040 those bonds have to get included and there that's why 0:05:54.080 --> 0:05:57.839 they're bought. Then what happens is after default, they get 0:05:57.880 --> 0:06:02.560 puked and the more opportunistic investors like hedge funds come 0:06:02.600 --> 0:06:06.839 in and the cycle starts over again. You mentioned that 0:06:07.000 --> 0:06:11.040 quote in the beginning that countries don't go bankrupt, and 0:06:11.120 --> 0:06:14.440 as you say, it's maybe true, but completely irrelevant to 0:06:14.520 --> 0:06:17.200 an actual creditor of the country, whether they're gonna get 0:06:17.200 --> 0:06:20.919 paid back or not. Why do countries choose to default? 0:06:21.000 --> 0:06:24.280 I mean, in theory, you know country, a government has 0:06:24.320 --> 0:06:27.279 certain choices it can make. It can cut back on 0:06:27.960 --> 0:06:32.480 domestic spending to prioritize lending. What are the conditions that 0:06:32.560 --> 0:06:35.440 tend to proceed a government making the choice, like, you 0:06:35.480 --> 0:06:38.680 know what, we're not going to We're what? Why does 0:06:38.720 --> 0:06:41.479 the why did they do that? It's uh so, so many, 0:06:41.520 --> 0:06:45.680 so many questions nestled and nested in what you just asked, Joe. 0:06:46.200 --> 0:06:51.240 It's always political. Countries don't typically borrow with the intention 0:06:51.320 --> 0:06:54.520 of default, but on some level it's always in the 0:06:54.560 --> 0:06:58.120 back of the mind of a politician because they borrow 0:06:58.400 --> 0:07:01.640 to get money they can use for their own purposes, 0:07:01.680 --> 0:07:05.960 whatever those are, whether there for legitimate infrastructure and and 0:07:06.200 --> 0:07:09.800 building or corrupt purposes, which in many cases they are. 0:07:09.279 --> 0:07:13.000 They they are, but it's a political decision. And when 0:07:13.080 --> 0:07:15.880 the it's only when the the money is cut off 0:07:16.000 --> 0:07:18.800 or threatened to be cut off, that political figures in 0:07:19.200 --> 0:07:22.640 borrowing countries decide that, well, maybe it's not worth the 0:07:22.680 --> 0:07:27.440 trouble is it is part of it, the idea that 0:07:27.720 --> 0:07:32.560 politicians are satisfying a domestic constituency, and so foreign investors 0:07:32.640 --> 0:07:36.320 kind of are a very easy demographic to just you know, 0:07:36.480 --> 0:07:38.520 leave out and say, well, we're going to screw over 0:07:38.520 --> 0:07:43.200 the foreign investors in order to satisfy our population easier 0:07:43.240 --> 0:07:45.680 and easier for a variety of reasons. One you've mentioned, 0:07:45.680 --> 0:07:50.600 which is that markets have short memories, and that's certainly true. 0:07:51.320 --> 0:07:54.000 But the other pieces that when a country runs into trouble, 0:07:54.640 --> 0:07:59.280 the multilateral organizations all rally around it, and the actually 0:07:59.280 --> 0:08:02.200 other governments rally around it. So if in the case 0:08:02.240 --> 0:08:04.920 of Sri Lanka is just a case in point, we're 0:08:04.920 --> 0:08:07.560 going to see we will see uh, the I m 0:08:07.640 --> 0:08:10.360 F and the World Bank and the Asian Development Bank 0:08:10.520 --> 0:08:14.760 and the G seven and the G twenty all saying, oh, 0:08:14.760 --> 0:08:19.440 poor Sri Lanka, not blaming Sri Lanka for for their problems, 0:08:20.080 --> 0:08:24.040 but looking for an opportunity to fleece foreign foreign lenders 0:08:24.320 --> 0:08:29.080 and that that's that is a consistent pattern. What's different today, UH, 0:08:29.080 --> 0:08:31.320 And I know we'll get to talk about this is 0:08:31.360 --> 0:08:36.000 the role of China, because China is increasingly has the 0:08:36.000 --> 0:08:40.800 whip hand in essentially in developing country lending. So explain 0:08:40.880 --> 0:08:44.360 that further. What exactly is the role of China and 0:08:44.440 --> 0:08:47.200 emerging markets and how much does the outlook for e 0:08:47.360 --> 0:08:50.920 M defaults depend on what China chooses to do or 0:08:50.960 --> 0:08:54.960 not do. I think China is the critical element in 0:08:55.080 --> 0:08:59.840 emerging market lending. The One Belt, One Road initiative has 0:09:00.000 --> 0:09:04.440 meant that China has UH provided money either loans or 0:09:04.559 --> 0:09:09.120 investments in dozens of countries around the world. For ports, 0:09:09.120 --> 0:09:14.080 for rails, for UH, communications, infrastructure, you name it. The 0:09:14.200 --> 0:09:17.520 Chinese are promoting it and UH and lending money to 0:09:17.559 --> 0:09:20.760 developing countries. So China has become and this this is 0:09:20.800 --> 0:09:24.360 the critical element. China has become a huge lender and 0:09:24.520 --> 0:09:28.040 investor in developing countries. But no one knows how big 0:09:28.080 --> 0:09:31.000 they are. No one knows, I mean the Chinese know, 0:09:31.200 --> 0:09:34.000 but no one else because the contracts under which they 0:09:34.040 --> 0:09:37.680 invest our secret. I've I've asked on many occasions to 0:09:37.720 --> 0:09:40.880 see a copy of these loan agreements, and it's always 0:09:42.640 --> 0:09:45.320 we can't talk about that. It's it's part of our agreement. 0:09:45.840 --> 0:09:47.760 And I don't think the even the I M F 0:09:48.400 --> 0:09:51.800 has a clue what the scale of those investments are, 0:09:51.840 --> 0:09:55.000 which means that when you face a restructuring, you've got 0:09:55.000 --> 0:09:59.600 a creditor, a very aggressive and important creditor, China, which 0:09:59.679 --> 0:10:02.760 does want to take a discount at all. So you 0:10:02.800 --> 0:10:05.960 have a super senior element there that we've never seen 0:10:06.000 --> 0:10:07.960 before in the history of E M lending. I was 0:10:08.000 --> 0:10:11.400 about to ask what kind of creditor is China. I know, 0:10:11.480 --> 0:10:13.880 it's hard to tell because we haven't really seen them 0:10:14.040 --> 0:10:17.760 enter a massive default cycle since they wrapped up their lending. 0:10:17.840 --> 0:10:20.040 And you're completely right that it's hard to tell the 0:10:20.080 --> 0:10:22.600 scale of that lending, and Bloomberg has made attempts at 0:10:22.640 --> 0:10:24.600 various points in time to put a number on it. 0:10:24.600 --> 0:10:28.120 It's a very very non transparent. But what sort of 0:10:28.120 --> 0:10:31.200 indication do we have of how they might behave in 0:10:31.200 --> 0:10:35.160 a distress situation, Well, how they behave in pretty much 0:10:35.240 --> 0:10:40.240 every commercial situation. Uh, they're right and you're wrong, and 0:10:40.320 --> 0:10:44.760 they're implacable foes on many levels, but particularly when it 0:10:44.800 --> 0:10:46.880 comes to the debt. It's it's just I'd like to 0:10:46.920 --> 0:10:49.640 just go back to this very little geeky but I 0:10:49.640 --> 0:10:53.560 think important point, which is, can you imagine a sitting 0:10:53.600 --> 0:10:57.240 down at a negotiating table with a group of creditors. 0:10:57.320 --> 0:10:59.640 You've got the I m F, the World Bank, other 0:10:59.800 --> 0:11:04.440 multi lateral institutions, and you've got different creditor groups, banks, 0:11:04.640 --> 0:11:09.560 industrial lenders, investors, UH and bond holders. Everyone's at the table, 0:11:10.320 --> 0:11:15.679 everyone's documents are on the table except for China. So 0:11:15.760 --> 0:11:19.160 you have this huge force, you know, in the room 0:11:19.200 --> 0:11:21.960 and outside the room that won't tell you how much 0:11:22.160 --> 0:11:25.320 they owe and isn't willing to take a discount to 0:11:25.760 --> 0:11:29.280 make things make things fit together. So it's almost in 0:11:29.320 --> 0:11:32.680 that climate, it's actually it actually becomes, in my view, 0:11:33.080 --> 0:11:38.760 impossible to have restructurings that really get countries out of 0:11:38.760 --> 0:11:41.320 the woods and put them on a strong financial path, 0:11:41.720 --> 0:11:43.880 because you've got one. Used to be that we would 0:11:43.880 --> 0:11:46.920 complain about the I m F being insisting on being 0:11:46.920 --> 0:11:50.640 super senior. Now you've got a creditor that is put 0:11:50.640 --> 0:11:53.520 in placing itself super senior to the I m F. 0:12:08.559 --> 0:12:11.640 Something UH that we talk about on the show from 0:12:11.640 --> 0:12:14.640 time to time is this sort of difference between you know, 0:12:14.720 --> 0:12:18.600 the financial cycle and the economic cycle. And you know, 0:12:18.640 --> 0:12:20.760 what we've been talking about so far, it's seems like 0:12:20.840 --> 0:12:23.680 very much the financial cycle. And you mentioned, you know, 0:12:23.720 --> 0:12:26.520 you have this situation where one country or two countries 0:12:26.559 --> 0:12:29.400 default suddenly all the money pulls back or on the flip. 0:12:30.160 --> 0:12:33.480 A bunch of retail investors see that, you know, looking 0:12:33.600 --> 0:12:35.800 open their copy of Barons and see that I'm the 0:12:35.840 --> 0:12:38.800 best best last five years. That's some e M funded Like, yeah, 0:12:38.840 --> 0:12:41.160 I'll put my money in there. What is the So 0:12:41.559 --> 0:12:46.280 there's this global clearly downturn in the sort of liquidity cycle. 0:12:46.559 --> 0:12:51.200 The financial cycle is clearly in retreat. What's the macro cycle, 0:12:51.240 --> 0:12:53.720 like the sort of like actual like underlying ECNT cycle. 0:12:53.720 --> 0:12:56.440 And how much stress is that putting countries under? I 0:12:56.480 --> 0:12:59.720 think the what's what's happening even in the last three months, 0:13:00.400 --> 0:13:05.240 prices of energy and foodstocks is something we haven't seen 0:13:05.280 --> 0:13:07.720 in a long long time, and it puts a lot 0:13:07.760 --> 0:13:10.240 of pressure on every country because the first, the first 0:13:10.240 --> 0:13:13.600 obligation of a government is to is to keep its 0:13:13.640 --> 0:13:16.640 people warm and fit. And I think the extent that 0:13:16.640 --> 0:13:18.640 that's put at risk, and it is at risk now 0:13:18.679 --> 0:13:22.079 in in dozens of countries. Countries really have no choice 0:13:22.120 --> 0:13:26.800 but to prioritize those needs over payment of foreign debt. 0:13:26.960 --> 0:13:30.240 It doesn't mean that they don't respect foreign debt or 0:13:30.360 --> 0:13:33.000 intend to restructure it or repay it at some point 0:13:33.040 --> 0:13:35.720 in time. But I think in the near term they'll 0:13:35.760 --> 0:13:40.640 make a correct political decision for themselves to delay, defer, 0:13:40.920 --> 0:13:44.480 or deny those payments. So Joe asked a question that 0:13:44.520 --> 0:13:47.480 I thought was interesting, which is why do countries default? 0:13:47.600 --> 0:13:51.040 And I want to ask a similar question about incentives 0:13:51.080 --> 0:13:54.120 and decision making. But you are at Elliott for a 0:13:54.240 --> 0:13:59.280 very long time. How did you decide what distressed investments 0:13:59.640 --> 0:14:04.200 to because you targeted, you know, some very specific not 0:14:04.320 --> 0:14:07.920 just countries, but very specific bonds issued by those countries. 0:14:09.280 --> 0:14:12.600 There are there are a few, um a few really 0:14:12.640 --> 0:14:17.200 important elements to any investing, and particularly sovereign debt investing. 0:14:17.720 --> 0:14:20.760 One is that the end. One is that the contract 0:14:20.960 --> 0:14:25.680 has to be strong, and sovereign bond contracts have gotten 0:14:26.040 --> 0:14:29.360 much much weaker over the last twenty years. Really a 0:14:29.400 --> 0:14:32.680 concerted effort on the part of the official sector. UH 0:14:32.720 --> 0:14:35.200 and the G seven Europeans have been at the at 0:14:35.240 --> 0:14:38.120 the forefront of this diluting covenants and making it more 0:14:38.160 --> 0:14:41.480 difficult to enforce in the event of a defall. But 0:14:41.600 --> 0:14:47.200 the most critical element is your basic financial analysis of 0:14:47.240 --> 0:14:50.880 the country. And uh and Tracy, you're absolutely right. You know, 0:14:50.960 --> 0:14:53.880 at Elliott we were extremely selective in the death that 0:14:53.920 --> 0:14:57.320 we bought because you really had to believe. You always 0:14:57.400 --> 0:14:59.880 have to believe when you're when you're buying sovereign debt 0:15:00.360 --> 0:15:04.800 that the debtor is capable of honoring its contracts. And 0:15:04.880 --> 0:15:07.080 so those are the two critical elements. Is the debt 0:15:07.080 --> 0:15:11.040 are able to pay? And contractually is there a way 0:15:11.080 --> 0:15:15.200 to keep them at the table. So I have to 0:15:15.240 --> 0:15:19.160 ask would you have bought Russian bonds with that in mind? 0:15:19.880 --> 0:15:22.200 I have never bought a Russian bond. I never would 0:15:22.240 --> 0:15:25.840 buy a Russian bond, Russian Russian um and in fact 0:15:25.880 --> 0:15:28.720 I hadn't I hadn't looked until recent days. I hadn't 0:15:28.760 --> 0:15:31.200 looked at the Russian bond contract for a very long time, 0:15:31.280 --> 0:15:36.160 and I had forgotten this that Russian debt Russia does 0:15:36.160 --> 0:15:42.640 not wave sovereign immunity. So the critical element of contemporary 0:15:42.680 --> 0:15:45.640 bond contracts is a waiver of sovereign immunity, which means 0:15:45.680 --> 0:15:48.960 that you can sue by agreement, you can actually go 0:15:49.000 --> 0:15:51.840 to court. You can go to discuss the issue exactly. 0:15:51.880 --> 0:15:54.560 You can go to court typically in either the US 0:15:54.680 --> 0:15:58.560 or the UK or both, and that is an essential element. 0:15:58.600 --> 0:16:01.560 The other one of the other critical pieces is not 0:16:01.640 --> 0:16:04.320 just waving immunity, but agreeing where you can be sued. 0:16:05.040 --> 0:16:08.280 So if Russia says I don't wave immunity, we're back 0:16:08.320 --> 0:16:11.160 to a world that we haven't seen in sovereign debt 0:16:11.520 --> 0:16:15.560 since the fifties, well before the Foreign Sovereign Munities Act 0:16:15.560 --> 0:16:18.240 and the State Immunities Act, where the sovereign is a 0:16:18.320 --> 0:16:22.760 beneficiary of absolute immunity. It's what sovereigns are. They do 0:16:22.800 --> 0:16:25.120 what they want when they want, they pay what they 0:16:25.120 --> 0:16:27.280 want when they want to pay it. And that's the 0:16:27.320 --> 0:16:30.840 position that Russia has staked out for itself. Why was 0:16:30.880 --> 0:16:33.400 there I mean, we had we talked about Russian debt, 0:16:33.440 --> 0:16:37.680 I think back March share early on after the invasion, 0:16:37.800 --> 0:16:39.520 But you know, we talked about the end of the 0:16:39.520 --> 0:16:42.480 fact that there weren't many covenants, that there were all 0:16:42.560 --> 0:16:45.000 kinds of things buried in the language that seemed to 0:16:45.000 --> 0:16:47.720 be sort of favorable for Russia all those years, even 0:16:47.760 --> 0:16:52.240 after the invasion of Crimea I think, which was in fourteen. 0:16:53.360 --> 0:16:56.800 Why was there still so much willingness between that period 0:16:56.840 --> 0:16:59.680 when it was clear that the country would be willing 0:16:59.680 --> 0:17:03.240 to be a military aggressor and engaging activities that people 0:17:03.280 --> 0:17:06.600 would associate with a prize state. Why up and for 0:17:06.640 --> 0:17:09.680 basically another eight years after that did there and then 0:17:09.680 --> 0:17:13.440 the conditions that you just mentioned about not waving sovereign immunity. 0:17:13.480 --> 0:17:16.800 Why was there so much willingness for all those years 0:17:16.880 --> 0:17:19.240 on the part of buyers to continue buying Russian bonds? 0:17:19.240 --> 0:17:22.439 In your view, because Russia was a great payer. They 0:17:22.600 --> 0:17:26.600 kept paying throughout even after the sanctions imposed, you know, 0:17:26.680 --> 0:17:31.440 post Crimea in and they showed no indication of not 0:17:31.560 --> 0:17:35.720 intending to honor their obligations. So Russia looked like a 0:17:35.960 --> 0:17:38.720 like like a strong credit. And in fact, Russia even 0:17:38.720 --> 0:17:43.480 at the beginning of this of this crisis, post January February, 0:17:43.680 --> 0:17:48.280 Russia insisted and did make payments. So Russia really in 0:17:48.560 --> 0:17:51.760 it appears to all intents to intend to be a 0:17:51.800 --> 0:17:57.200 responsible debtor. Right now, it's it's um because of sanctions, 0:17:57.240 --> 0:17:59.840 it's foreclosed from doing that. I want to go back 0:17:59.880 --> 0:18:02.560 to something you said about Sri Lanka and you're like, Okay, 0:18:02.560 --> 0:18:05.040 there's a default, but the world comes together and all 0:18:05.040 --> 0:18:08.439 these international institutions that I'm at, the G seven, the 0:18:08.480 --> 0:18:12.760 Asian Development Bank, etcetera. And they try to help Sri 0:18:12.800 --> 0:18:15.040 Lanka out. It's not Sri Lanka's fault that they're in 0:18:15.080 --> 0:18:17.680 the stress. And when you said that, I clearly got 0:18:17.720 --> 0:18:20.600 the impression that you think that this is a bad system, 0:18:20.800 --> 0:18:24.320 or that this sort of generosity towards Sri Lanka in 0:18:24.359 --> 0:18:27.760 the wake of a default is not productive or misplaced. 0:18:27.920 --> 0:18:30.040 Can you talk about your view a little bit more 0:18:30.040 --> 0:18:32.200 on that. I mean, it's been a pretty tough two years. 0:18:32.240 --> 0:18:36.520 There was a pandemic, then there's been surging inflation. Why 0:18:36.600 --> 0:18:40.920 shouldn't all these public or official institutions take the view 0:18:40.960 --> 0:18:43.440 that Sri Lanka got into a bad place and they 0:18:43.440 --> 0:18:47.159 need help. If we go back to basics. And I 0:18:47.200 --> 0:18:50.160 wrote a little piece about this that I called Unsafe 0:18:50.160 --> 0:18:57.639 at any Price, comparing sovereign debt to the corvet sovereign debt. 0:18:57.720 --> 0:19:00.600 The idea of a sovereign borrowing and a current see 0:19:00.680 --> 0:19:05.680 that isn't its own, is fundamentally flawed. It's a really 0:19:06.200 --> 0:19:09.880 bad idea. But the entire structure of the sovereign dett 0:19:09.920 --> 0:19:14.040 industry is you know, it supports the idea that it's 0:19:14.520 --> 0:19:17.080 that it's not a bad idea. But if you take 0:19:17.080 --> 0:19:19.280 the case of Sri Lanka, and Sri Lanka had borrowed 0:19:19.320 --> 0:19:22.960 in its own currency rather than in the dollar or 0:19:23.000 --> 0:19:26.280 in the euro, it wouldn't have a problem because it 0:19:26.320 --> 0:19:29.720 could just print its own currency. Now, the response to that, 0:19:30.160 --> 0:19:32.400 and we get this all the time, people saying, well, 0:19:32.400 --> 0:19:35.520 but they couldn't borrow if they couldn't borrow that much 0:19:35.520 --> 0:19:39.199 money unless they agree to borrow dollars, And isn't that 0:19:39.280 --> 0:19:42.960 just the point? So would you argue therefore, I mean, 0:19:43.359 --> 0:19:45.679 you know, again, I'm really struck by this idea that 0:19:45.840 --> 0:19:49.520 flows often start because retail investors see the adds in 0:19:49.520 --> 0:19:52.800 the newspapers that really this whole system of a sort 0:19:52.840 --> 0:19:58.760 of like public financialized sovereign debt market particular for MS, 0:19:58.760 --> 0:20:02.919 sort of flawed the core, completely completely flawed, completely rotten. 0:20:03.320 --> 0:20:05.399 If it were if 're up to me and I 0:20:05.440 --> 0:20:09.920 had my magic wand I would repeal the Sovereign Immunities Act, 0:20:10.040 --> 0:20:13.240 and I'd repeal the State Immunities Act, and I would 0:20:13.359 --> 0:20:16.120 I would go back to the principle of absolute immunity, 0:20:16.240 --> 0:20:19.480 because if you're if you're looking at absolute immunity, and 0:20:19.520 --> 0:20:21.840 maybe the Russians have the right idea and perhaps not 0:20:21.960 --> 0:20:25.800 borrowing in occurrency not their own, but the right idea, 0:20:25.880 --> 0:20:28.080 and saying you're looking at if you look at me 0:20:28.200 --> 0:20:31.440 as a sovereign, I'll pay you what I want when 0:20:31.480 --> 0:20:34.840 I want, and you have to trust me. And that 0:20:34.920 --> 0:20:38.520 would put investors on a very different footing. It wouldn't 0:20:38.520 --> 0:20:41.760 make the underwinding community at all happy about it because 0:20:41.800 --> 0:20:43.840 it would mean that they couldn't sell as many bonds. 0:20:44.400 --> 0:20:47.760 But wouldn't that be sagatary. It definitely sounds like you'd 0:20:47.760 --> 0:20:51.159 probably get less boom bust. It would be harder to 0:20:51.200 --> 0:20:53.960 sell debt probably during the boom, I guess, but you 0:20:54.000 --> 0:20:56.760 don't get these huge swings and flows. I think that's 0:20:56.800 --> 0:21:00.119 exactly right. Could you talk a little bit about E 0:21:00.400 --> 0:21:04.480 s G and how that relates to sovereign debt, because 0:21:04.520 --> 0:21:06.720 you know, we're talking about the Russian bonds and one 0:21:06.720 --> 0:21:08.800 of the things that stands out is that if you 0:21:08.840 --> 0:21:13.320 read the risk factors, it's just a litany of bad 0:21:13.400 --> 0:21:16.040 stuff that Putin has done. Basically saying that he's done 0:21:16.080 --> 0:21:18.520 a bunch of bad stuff, there might be sanctions, he 0:21:18.520 --> 0:21:21.160 could do more bad stuff, And yet you had big 0:21:21.200 --> 0:21:25.960 investors who ostensibly care about E s G and social 0:21:26.040 --> 0:21:28.840 values who bought a lot of the debt. And at 0:21:28.880 --> 0:21:30.920 the same time, now you're seeing a lot of people 0:21:30.920 --> 0:21:35.200 talk about E s G as a sort of political consideration. 0:21:35.280 --> 0:21:38.200 So do you want to lend to Russia if it's 0:21:38.200 --> 0:21:41.640 considered an enemy of the United States and things like that. 0:21:42.680 --> 0:21:45.679 I think the short answer to that is no. I 0:21:45.680 --> 0:21:48.159 think a lot of people are not going to a 0:21:48.160 --> 0:21:51.160 lot of people will be taking E s G into account, 0:21:51.200 --> 0:21:54.840 and there will be less of a market for certain debtors. 0:21:54.840 --> 0:21:59.040 But it's um if if you're gonna cast the E 0:21:59.240 --> 0:22:02.600 s G net over developing countries, generally you're gonna run 0:22:02.600 --> 0:22:05.359 into trouble because we're talking about countries that you know 0:22:05.520 --> 0:22:09.200 that on average, and it's unfair to to malign people 0:22:09.320 --> 0:22:13.480 as an average, governance is poor and in many cases 0:22:13.840 --> 0:22:17.840 uh corruption is rampant. And at the same time, countries 0:22:17.880 --> 0:22:21.800 are producer of natural resources that are desperately needed by 0:22:21.880 --> 0:22:24.800 Western industrial countries. So people who will need to turn 0:22:24.800 --> 0:22:27.639 a blind eye to all those factors because of the 0:22:28.240 --> 0:22:32.920 geopolitics and the geo economics. So do you think we 0:22:32.960 --> 0:22:35.879 will see I mean, okay, so so far in this cycle, 0:22:35.880 --> 0:22:39.119 what have we seening? We've seen Sri Lanka, it has defaulted, 0:22:39.640 --> 0:22:43.879 anyone else? Uh, Lebanon? Do you expect to see several 0:22:43.880 --> 0:22:45.720 more coming? I mean, if you say this is you know, 0:22:45.760 --> 0:22:47.880 I think in your first entry he said a perfect storm, 0:22:48.000 --> 0:22:49.920 which is a phrase and Tracy and I know in 0:22:49.960 --> 0:22:55.320 every day so every episode these days, whatever it is, 0:22:55.440 --> 0:22:58.399 it's in a perfect storm. The dollars in a perfect 0:22:58.440 --> 0:23:01.960 storm text docs is a perfect it's the most But 0:23:02.080 --> 0:23:05.160 what there are a lot of perfect storms happening right now. 0:23:05.240 --> 0:23:08.600 I mean, would you expect to see this just the 0:23:08.640 --> 0:23:11.760 absolute number of defaults pick up significantly? I would expect 0:23:11.800 --> 0:23:14.639 it to And I think I think it's actually what 0:23:14.680 --> 0:23:18.160 you're describing is actually one big perfect storm because all 0:23:18.160 --> 0:23:22.040 these things are related, and it's because we haven't seen 0:23:22.440 --> 0:23:25.560 this kind of a boom and a bust in financial 0:23:25.600 --> 0:23:29.600 markets where this kind of a bust in what about 0:23:29.640 --> 0:23:32.960 fifteen years, uh, and maybe on the tech side over 0:23:33.000 --> 0:23:36.720 twenty years. So it's there are so many elements that 0:23:36.800 --> 0:23:41.040 conspire against sovereign debtors continuing to be able to pay 0:23:41.520 --> 0:23:44.480 what they are. So you touched on this a number 0:23:44.480 --> 0:23:47.560 of times. What would you expect a bust of a 0:23:47.680 --> 0:23:51.800 significant scale to lead to some sort of significant change 0:23:51.920 --> 0:23:56.320 in the way emerging market debt markets actually work? I mean, 0:23:56.720 --> 0:23:59.440 would you see the balance of power shift more to 0:23:59.560 --> 0:24:02.359 the credit DERs away from the issuers. Would you expect 0:24:02.480 --> 0:24:05.119 less foreign currency debt to be issued in general and 0:24:05.200 --> 0:24:07.400