1 00:00:10,080 --> 00:00:14,040 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast. 2 00:00:14,200 --> 00:00:17,360 Speaker 1: I'm Tracy Alloway, my co host Joe Wis, and Vault 3 00:00:17,520 --> 00:00:20,759 Speaker 1: is away this week. I believe he is sampling the 4 00:00:20,840 --> 00:00:25,000 Speaker 1: electric scooter scene over in Los Angeles. But this actually 5 00:00:25,040 --> 00:00:28,960 Speaker 1: gives me an opportunity to dig into a slightly geek 6 00:00:29,040 --> 00:00:33,400 Speaker 1: year subject, and that would be sovereign debt restructuring. This 7 00:00:33,440 --> 00:00:37,120 Speaker 1: is when governments opt to exchange their loans or bonds 8 00:00:37,320 --> 00:00:40,320 Speaker 1: for new loans or bonds, you know, typically less expensive ones, 9 00:00:40,680 --> 00:00:42,639 Speaker 1: or when they decide to pay back their debt at 10 00:00:42,680 --> 00:00:46,520 Speaker 1: a slower pace or a cheaper pace or whatever. All 11 00:00:46,520 --> 00:00:49,920 Speaker 1: of this hashed out amongst lawyers, typically acting on behalf 12 00:00:49,920 --> 00:00:52,239 Speaker 1: of the borrower the country that borrow the money, and 13 00:00:52,280 --> 00:00:56,200 Speaker 1: the lenders the investors that lent it. And yes, I 14 00:00:56,240 --> 00:01:01,440 Speaker 1: can sense your excitement from here, but before you turn 15 00:01:01,520 --> 00:01:04,160 Speaker 1: this podcast off, we are actually going to be marrying 16 00:01:04,480 --> 00:01:06,920 Speaker 1: one of the biggest stories in finance and markets right 17 00:01:06,959 --> 00:01:11,039 Speaker 1: now with the theme of sovereign debt restructurings. And that 18 00:01:11,240 --> 00:01:15,240 Speaker 1: story is one MDB, the one MDB scandal that is 19 00:01:15,280 --> 00:01:19,200 Speaker 1: currently rocking Asia and has certainly extended beyond the region 20 00:01:19,680 --> 00:01:22,440 Speaker 1: all the way over to Goldman Sachs in New York. 21 00:01:22,800 --> 00:01:25,040 Speaker 1: And the interesting thing about one m dB is that 22 00:01:25,120 --> 00:01:30,520 Speaker 1: it involves government guaranteed debt in addition to super yachts 23 00:01:30,560 --> 00:01:34,720 Speaker 1: and Leonardo DiCaprio, and it can actually be I think 24 00:01:34,760 --> 00:01:38,920 Speaker 1: a jumping off point to discuss the fundamental heart of 25 00:01:39,040 --> 00:01:42,399 Speaker 1: sovereign debt, which is a government guarantee or a promise 26 00:01:43,080 --> 00:01:47,200 Speaker 1: that the borrower the state is going to repay the 27 00:01:47,240 --> 00:01:50,360 Speaker 1: money that it's borrowed. So here with us to discuss this, 28 00:01:50,440 --> 00:01:53,560 Speaker 1: and I'm very excited about it, is Matto Galati. He's 29 00:01:53,560 --> 00:01:56,559 Speaker 1: a professor of law at Duke University and he also 30 00:01:56,640 --> 00:01:59,800 Speaker 1: blogs over at Credit Slips, which I urge you all 31 00:01:59,840 --> 00:02:02,680 Speaker 1: to read. So Mitto, thank you so much for coming on. 32 00:02:03,520 --> 00:02:06,440 Speaker 1: Thank you Tracy. It's a delight to be talking to 33 00:02:06,440 --> 00:02:09,000 Speaker 1: you after such a long time. It has been a 34 00:02:09,040 --> 00:02:12,680 Speaker 1: long time. So I'm going to outsource some of my 35 00:02:12,760 --> 00:02:15,440 Speaker 1: hosting abilities since Joe is away, and I'm going to 36 00:02:15,560 --> 00:02:18,720 Speaker 1: ask you to set the scene for us. What is 37 00:02:18,800 --> 00:02:22,320 Speaker 1: the one MDB scandal and how does it feed into 38 00:02:22,440 --> 00:02:27,919 Speaker 1: your particular area of expertise. So the one MDB scandal, 39 00:02:28,000 --> 00:02:32,360 Speaker 1: and I'm going to draw here heavily from articles in 40 00:02:32,480 --> 00:02:35,640 Speaker 1: Bloomberg and the Wall Street Journal and the Financial Times. 41 00:02:36,320 --> 00:02:39,600 Speaker 1: I did not come to the one MDB scandal right 42 00:02:39,639 --> 00:02:42,280 Speaker 1: at the start. I came to it like many others 43 00:02:42,320 --> 00:02:46,560 Speaker 1: did because of writing in the press and this wonderful 44 00:02:46,600 --> 00:02:50,520 Speaker 1: book um that two Wall Street Journal reporters did. But 45 00:02:50,800 --> 00:02:55,960 Speaker 1: one bit about the one mdb uh scandal caught my attention, 46 00:02:56,080 --> 00:03:02,000 Speaker 1: and that was that this finance vehicle, essentially a sovereign 47 00:03:02,080 --> 00:03:07,680 Speaker 1: wealth fund for Malaysia that didn't do the normal stuff 48 00:03:07,720 --> 00:03:10,400 Speaker 1: that sovereign wealth fun did, which was to invest the 49 00:03:10,400 --> 00:03:14,519 Speaker 1: money of the country. Instead, it was borrowing money, sort 50 00:03:14,560 --> 00:03:16,800 Speaker 1: of the opposite of what you would normally do with 51 00:03:16,840 --> 00:03:19,480 Speaker 1: a sovereign wealth fund. It was a sovereign wealth fund 52 00:03:19,520 --> 00:03:23,680 Speaker 1: that had no wealth of the sovereign. It was accumulating 53 00:03:23,720 --> 00:03:29,400 Speaker 1: wealth by borrowing from outside investors and then siphoning it 54 00:03:29,440 --> 00:03:34,040 Speaker 1: off to these corrupt um financiers who were running it. 55 00:03:34,920 --> 00:03:37,960 Speaker 1: And what interested me about that was not only were 56 00:03:38,000 --> 00:03:41,800 Speaker 1: they corrupt, but they had managed in a couple of 57 00:03:41,800 --> 00:03:45,080 Speaker 1: the bonds to get the State of Malaysia to actually 58 00:03:45,120 --> 00:03:50,240 Speaker 1: guarantee the payments to the outside investors, and so it 59 00:03:50,400 --> 00:03:55,360 Speaker 1: sort of merged this corruption angle with sovereign financing because 60 00:03:55,400 --> 00:03:58,720 Speaker 1: it was basically corruption in the raising of the money 61 00:03:59,080 --> 00:04:02,680 Speaker 1: and then sticky the bill to the taxpayers. Now we've 62 00:04:02,680 --> 00:04:05,640 Speaker 1: got even more interesting sort of at the end of 63 00:04:05,640 --> 00:04:10,960 Speaker 1: the story, after the scandal is revealed, and then the 64 00:04:11,280 --> 00:04:15,360 Speaker 1: Malaysian government falls, which is fairly stunning in corruption scandals 65 00:04:15,400 --> 00:04:18,040 Speaker 1: in South Asia. Usually for those of us who live 66 00:04:18,080 --> 00:04:20,839 Speaker 1: in South Asia were used to this kind of corruption scandal, 67 00:04:21,200 --> 00:04:24,520 Speaker 1: but this was just bigger than even what we're used to. 68 00:04:24,920 --> 00:04:28,040 Speaker 1: And the government falls and the new government comes in, 69 00:04:28,360 --> 00:04:31,520 Speaker 1: and there were a couple of these one MDB financings 70 00:04:31,560 --> 00:04:34,680 Speaker 1: that did not have a state guarantee, and the new 71 00:04:34,720 --> 00:04:37,240 Speaker 1: government comes in and one of the first things that 72 00:04:37,279 --> 00:04:41,640 Speaker 1: the Finance minister does is to slap a new guarantee 73 00:04:41,960 --> 00:04:46,840 Speaker 1: on these corrupt debts, which to me was completely bizarre. 74 00:04:47,080 --> 00:04:51,120 Speaker 1: So years ago, my friend Liebu Kite and I worked 75 00:04:51,160 --> 00:04:55,719 Speaker 1: on corrupt loans in Iraq and in our research, one 76 00:04:55,760 --> 00:04:59,039 Speaker 1: of the things that we discovered was, you know, the 77 00:04:59,160 --> 00:05:02,880 Speaker 1: one way for countries to get out of debt obligations 78 00:05:02,880 --> 00:05:06,880 Speaker 1: in a restructuring or just in a court proceeding is 79 00:05:06,920 --> 00:05:10,600 Speaker 1: to have evidence of corruption. If there's evidence of corruption 80 00:05:11,760 --> 00:05:14,920 Speaker 1: by sort especially by the agents of the bank. Then 81 00:05:15,120 --> 00:05:17,320 Speaker 1: you can go to court and say this is not 82 00:05:17,440 --> 00:05:19,960 Speaker 1: really our loan, stick this to the bank that was 83 00:05:20,040 --> 00:05:25,640 Speaker 1: corrupt and engineered the loan. Malaysia had this evidence in spades. 84 00:05:25,720 --> 00:05:28,440 Speaker 1: I mean, the reporters had done a fantastic job of 85 00:05:28,600 --> 00:05:32,280 Speaker 1: uncovering all this evidence. So Malaysia could have said we're 86 00:05:32,320 --> 00:05:35,880 Speaker 1: not going to pay this. Instead that they did the opposite, 87 00:05:36,279 --> 00:05:39,880 Speaker 1: which is to embrace the loan and say, even though 88 00:05:39,920 --> 00:05:43,040 Speaker 1: it was corrupt, we're gonna stick our taxpayers with it. 89 00:05:43,080 --> 00:05:46,359 Speaker 1: And these are poor taxpayers a poor country, and it 90 00:05:46,440 --> 00:05:50,520 Speaker 1: dramatically increases their debt stock and you know, so there 91 00:05:50,520 --> 00:05:54,799 Speaker 1: are all sorts of bad things that happen, and that's 92 00:05:54,839 --> 00:05:57,400 Speaker 1: what got my interest, and I started writing about this 93 00:05:57,560 --> 00:06:02,560 Speaker 1: particular aspect of this, and I'm continuing to do research 94 00:06:02,640 --> 00:06:04,359 Speaker 1: on this, and I'm happy to talk about that. But 95 00:06:04,400 --> 00:06:07,320 Speaker 1: that's sort of the back story on this, right So 96 00:06:07,400 --> 00:06:09,560 Speaker 1: I definitely want to ask you about your research. But 97 00:06:09,720 --> 00:06:13,560 Speaker 1: just in summary, the oddity here in your opinion is 98 00:06:13,600 --> 00:06:18,360 Speaker 1: that we we basically had successive Malaysian governments who have 99 00:06:18,760 --> 00:06:23,840 Speaker 1: slapped guarantees or confirmed guarantees on one MTB bonds even 100 00:06:23,880 --> 00:06:28,160 Speaker 1: after uncovering that alleged bad behavior on the part of 101 00:06:28,200 --> 00:06:32,120 Speaker 1: the previous regime, and of course, despite that discovery, they 102 00:06:32,160 --> 00:06:34,920 Speaker 1: decided to honor the debt and full at least so far. 103 00:06:35,600 --> 00:06:37,680 Speaker 1: And they've gone so far as to say this sort 104 00:06:37,680 --> 00:06:41,920 Speaker 1: of explicitly, why would they do that? What has your 105 00:06:42,000 --> 00:06:46,000 Speaker 1: sort of early research suggests on that front. So there 106 00:06:46,040 --> 00:06:49,679 Speaker 1: are two explanations in the literature. So there's in a sense, 107 00:06:49,760 --> 00:06:52,800 Speaker 1: this is not a completely new phenomenon. So if you 108 00:06:52,920 --> 00:06:55,960 Speaker 1: go back to I mean, the most vivid example for 109 00:06:56,080 --> 00:07:00,080 Speaker 1: me is South Africa and the transition from the part 110 00:07:00,080 --> 00:07:03,719 Speaker 1: that government to the a n C government. So that's 111 00:07:03,800 --> 00:07:06,280 Speaker 1: one case in which you know, a lot of the 112 00:07:06,360 --> 00:07:10,920 Speaker 1: debts that the apartheid government incurred was to buy arms 113 00:07:10,960 --> 00:07:15,040 Speaker 1: to put down you know, armed insurrection and basically the 114 00:07:15,080 --> 00:07:18,920 Speaker 1: pro democracy movement. So one would have thought, and the 115 00:07:19,000 --> 00:07:22,400 Speaker 1: many NGOs thought, look, those debts are as ugly and 116 00:07:22,560 --> 00:07:27,120 Speaker 1: corrupt and evil as any debts possibly could and the 117 00:07:27,200 --> 00:07:30,280 Speaker 1: new government can repudiate it. The new government of South 118 00:07:30,320 --> 00:07:33,640 Speaker 1: Africa post apart that did not reputed it. Then they 119 00:07:33,680 --> 00:07:38,360 Speaker 1: paid those debts in full. And their rationale was, look, 120 00:07:38,560 --> 00:07:41,800 Speaker 1: our foreign advisors who help us raise money on the 121 00:07:41,920 --> 00:07:46,760 Speaker 1: capital markets have said it will show that we are good. Um, 122 00:07:46,920 --> 00:07:49,520 Speaker 1: we are good borrowers that will pay all our debts 123 00:07:49,600 --> 00:07:52,880 Speaker 1: regardless of you know, what they were used for. We're 124 00:07:52,960 --> 00:07:56,680 Speaker 1: just so good And you know there is some economic 125 00:07:56,720 --> 00:07:59,440 Speaker 1: logic to it, I guess, but we just didn't know 126 00:07:59,480 --> 00:08:01,920 Speaker 1: the ants or to the question of whether it helps 127 00:08:01,920 --> 00:08:05,320 Speaker 1: you or not if you pay stupid debts or corrupt debts. Right, 128 00:08:05,520 --> 00:08:08,720 Speaker 1: you're basically dealing in in theoreticals. Right, if you go 129 00:08:08,760 --> 00:08:11,080 Speaker 1: down one course of action, which is honoring the debt, 130 00:08:11,160 --> 00:08:13,440 Speaker 1: you're never going to know what would happen if you 131 00:08:13,560 --> 00:08:16,880 Speaker 1: repudiated the debt. Yeah, so it's one one course of 132 00:08:16,880 --> 00:08:20,520 Speaker 1: action is sort of that you think it'll it'll improve 133 00:08:20,560 --> 00:08:23,920 Speaker 1: your credit rating or lower your borrowing costs. The other 134 00:08:24,000 --> 00:08:26,840 Speaker 1: courses you can reduce your your debt stock and so 135 00:08:26,880 --> 00:08:29,120 Speaker 1: there there are these two stories. But the story for 136 00:08:29,240 --> 00:08:33,240 Speaker 1: paying it is it'll it'll improve your reputation as a borrower, 137 00:08:34,640 --> 00:08:37,040 Speaker 1: And we just don't know the answer. But that's the 138 00:08:37,040 --> 00:08:41,200 Speaker 1: theoretical conjecture that it will improve your reputation as a borrower. 139 00:08:41,679 --> 00:08:43,920 Speaker 1: So how does this play into one MDB and what 140 00:08:44,000 --> 00:08:47,120 Speaker 1: you've found so far? So the one MDB case is 141 00:08:47,320 --> 00:08:52,200 Speaker 1: very useful because usually the way the situation arises is 142 00:08:52,280 --> 00:08:56,840 Speaker 1: that you have a corrupt debt that the country could repudiate, 143 00:08:57,160 --> 00:09:00,120 Speaker 1: but it doesn't repudiate, it just goes on paying it. 144 00:09:00,520 --> 00:09:03,000 Speaker 1: So it's when I say corrupted, is one that a 145 00:09:03,080 --> 00:09:06,400 Speaker 1: court would recognize as corrupt and would say, okay, you 146 00:09:06,440 --> 00:09:10,280 Speaker 1: don't have to pay it. In one MDB they had 147 00:09:10,320 --> 00:09:14,200 Speaker 1: at least a few of these one MDB H debts 148 00:09:14,240 --> 00:09:16,800 Speaker 1: that did not have a state guarantee, and then they 149 00:09:16,800 --> 00:09:20,720 Speaker 1: slapped the state guarantee on them afterwards. So it allows 150 00:09:20,800 --> 00:09:24,280 Speaker 1: us to empirically test at the point at which they 151 00:09:24,320 --> 00:09:27,640 Speaker 1: put on this guarantee whether or not the market for 152 00:09:27,760 --> 00:09:32,199 Speaker 1: other Malaysian bonds actually improved. So do the borrowing costs 153 00:09:32,200 --> 00:09:35,960 Speaker 1: of Malaysia go down after it does this? And we 154 00:09:36,040 --> 00:09:41,840 Speaker 1: can measure quite precisely whether the benefit from slapping the 155 00:09:41,880 --> 00:09:46,160 Speaker 1: guarantee was actually greater than the cost of the guarantee. 156 00:09:46,640 --> 00:09:49,920 Speaker 1: And basically the data show so far. This is work 157 00:09:49,960 --> 00:09:53,040 Speaker 1: that I'm doing with Ugo Panitza at the Graduate Institute 158 00:09:53,080 --> 00:09:56,560 Speaker 1: in Geneva, and we can't find any evidence of even 159 00:09:56,600 --> 00:10:00,080 Speaker 1: the slightest benefit to Malaysia. Their yields didn't go on 160 00:10:00,160 --> 00:10:03,360 Speaker 1: at all. Like basically, it's just a huge loss for 161 00:10:03,400 --> 00:10:06,720 Speaker 1: the Malaysian people and the new government. So if there's 162 00:10:06,800 --> 00:10:11,840 Speaker 1: some if there's no empirical evidence, no hard evidence of 163 00:10:12,080 --> 00:10:15,880 Speaker 1: a benefit to Malaysia from honoring the debt, is there 164 00:10:15,920 --> 00:10:19,199 Speaker 1: may be a technical reason that they might have been 165 00:10:19,200 --> 00:10:21,320 Speaker 1: thinking about. For instance, are they worried that if they 166 00:10:21,360 --> 00:10:24,560 Speaker 1: don't honor one MDB bonds they're going to cause like 167 00:10:24,679 --> 00:10:28,680 Speaker 1: a cross default or something on their other debt. Good 168 00:10:28,760 --> 00:10:32,760 Speaker 1: question That one MDB bonds did not have cross default 169 00:10:32,800 --> 00:10:36,679 Speaker 1: provisions with the other bonds, and that leads to the 170 00:10:36,720 --> 00:10:42,920 Speaker 1: possibility of another explanation, which, unfortunately, from my twenty years 171 00:10:42,920 --> 00:10:46,920 Speaker 1: of working on sovereign debt restructuring, is the one I 172 00:10:46,960 --> 00:10:50,600 Speaker 1: think is the more plausible explanation, which is that there 173 00:10:50,640 --> 00:10:53,160 Speaker 1: are people in the current government, even though it's a 174 00:10:53,160 --> 00:10:58,520 Speaker 1: new government who who were either involved or who know 175 00:10:58,640 --> 00:11:01,480 Speaker 1: there are people who were involved in the corruption that 176 00:11:01,600 --> 00:11:05,760 Speaker 1: took place earlier, and they don't want a trial where 177 00:11:05,800 --> 00:11:10,800 Speaker 1: that corruption would get uncovered. And I think that in 178 00:11:10,960 --> 00:11:14,120 Speaker 1: almost all of these cases, even though you have a 179 00:11:14,120 --> 00:11:17,240 Speaker 1: new government, the new government does not want to uncover 180 00:11:17,440 --> 00:11:20,520 Speaker 1: the Really the ugly secrets of what happened, and they 181 00:11:20,520 --> 00:11:23,960 Speaker 1: don't want a discovery process of the bad behavior. Yeah, 182 00:11:24,000 --> 00:11:27,480 Speaker 1: because some investor is going to sue regardless, saying you 183 00:11:27,559 --> 00:11:30,480 Speaker 1: have to bay me, because they're always innocent investors who 184 00:11:30,520 --> 00:11:34,880 Speaker 1: bought this on the secondary market. And then then you 185 00:11:34,920 --> 00:11:39,079 Speaker 1: will have at least some court process or some journalists 186 00:11:39,080 --> 00:11:42,320 Speaker 1: will then go uncover this stuff because it's so juicy, 187 00:11:42,520 --> 00:11:45,240 Speaker 1: and then you know, more politicians will fall. I mean, 188 00:11:45,559 --> 00:11:47,640 Speaker 1: this is you know, if we talk about this later, 189 00:11:48,000 --> 00:11:50,320 Speaker 1: then the news story that is in the headlines, the 190 00:11:50,320 --> 00:11:53,600 Speaker 1: Mozambique story is just it said, almost at the one 191 00:11:53,679 --> 00:11:59,559 Speaker 1: MDB level of corruption and hiding and successor governments who 192 00:11:59,559 --> 00:12:03,840 Speaker 1: are and more corrupt or you know, in in collusion 193 00:12:03,920 --> 00:12:06,760 Speaker 1: with prior governments and everybody's just sticking the bill to 194 00:12:06,880 --> 00:12:10,160 Speaker 1: the population of a poor country. Oh yes, I definitely 195 00:12:10,160 --> 00:12:12,360 Speaker 1: want to ask you about Mozambique in a few minutes. 196 00:12:12,400 --> 00:12:15,240 Speaker 1: I can't resist an opportunity to talk about tuna bonds. 197 00:12:15,480 --> 00:12:20,720 Speaker 1: But before we do, just generally, how how difficult is 198 00:12:20,760 --> 00:12:26,240 Speaker 1: it for a country to establish that debt issued by 199 00:12:26,280 --> 00:12:29,840 Speaker 1: a previous regime was actually corrupt? What would they need 200 00:12:29,920 --> 00:12:35,000 Speaker 1: to prove? Ordinarily it is very difficult to do that. So, 201 00:12:36,840 --> 00:12:41,600 Speaker 1: you know, academics for almost a hundred years have been 202 00:12:41,640 --> 00:12:45,439 Speaker 1: wrestling with this question of whether or not new governments 203 00:12:45,520 --> 00:12:49,840 Speaker 1: should have to pay the debts of prior corrupt governments. 204 00:12:49,880 --> 00:12:53,120 Speaker 1: It's called the doctrine of odious debts. But but the 205 00:12:53,160 --> 00:12:56,920 Speaker 1: problem is international law has never recognized such a doctrine 206 00:12:56,920 --> 00:13:00,480 Speaker 1: of odious debts. Periodically people have tried to get it 207 00:13:00,520 --> 00:13:03,880 Speaker 1: to recognize, but the law international law of state, what 208 00:13:04,040 --> 00:13:07,720 Speaker 1: is called state succession, is quite strict. You have to 209 00:13:07,760 --> 00:13:12,439 Speaker 1: pay the debts of a prior government regardless. But there are, 210 00:13:12,559 --> 00:13:15,240 Speaker 1: of course, since this is law, there are exceptions. And 211 00:13:15,280 --> 00:13:19,520 Speaker 1: the exception is if in the making of the loan 212 00:13:19,800 --> 00:13:24,679 Speaker 1: the prior debt, there was corruption by the agents, particularly 213 00:13:24,800 --> 00:13:29,880 Speaker 1: the agents of the lenders, then the court just says, well, 214 00:13:29,920 --> 00:13:33,080 Speaker 1: then that's not a debt of the country. We're just 215 00:13:33,120 --> 00:13:38,600 Speaker 1: going to shift that debt to either the corrupt government 216 00:13:38,720 --> 00:13:42,439 Speaker 1: leader or the banks. The banks who did it, they 217 00:13:42,440 --> 00:13:46,199 Speaker 1: were corrupt, so it's their debt. But importantly for us, 218 00:13:46,240 --> 00:13:48,360 Speaker 1: it is not shifted to the people. But this is 219 00:13:48,640 --> 00:13:54,400 Speaker 1: very difficult to engineer and it is almost never done. 220 00:13:54,480 --> 00:13:58,120 Speaker 1: Governments just don't want to do it one MDB actually 221 00:13:58,160 --> 00:14:02,679 Speaker 1: gave us a case where could have been done because 222 00:14:03,000 --> 00:14:05,720 Speaker 1: you know, no thanks to the Malaysian government, but thanks 223 00:14:05,800 --> 00:14:09,280 Speaker 1: to the reporters who spent years, and maybe thanks to 224 00:14:09,480 --> 00:14:13,280 Speaker 1: Leonardo DiCaprio because that's what you know, and Beyonce and 225 00:14:13,320 --> 00:14:16,960 Speaker 1: whoever else was involved who made the story really interesting. 226 00:14:18,440 --> 00:14:21,120 Speaker 1: I need to stand up for Beyonce. I don't think 227 00:14:22,960 --> 00:14:26,480 Speaker 1: I'm sorry. My knowledge of pop culture is really really bad, 228 00:14:26,520 --> 00:14:30,400 Speaker 1: but I remember there were some big music Swiss beats. Okay, 229 00:14:30,440 --> 00:14:34,120 Speaker 1: if that that's a person who makes music, but yes, 230 00:14:34,400 --> 00:14:38,040 Speaker 1: but I I Leonardo certainly got the whole world interested. 231 00:14:38,080 --> 00:14:41,360 Speaker 1: And this new character Joe Lo who you know, was 232 00:14:41,480 --> 00:14:44,960 Speaker 1: running around on his yacht and the Thai waters coverting 233 00:14:45,000 --> 00:14:48,560 Speaker 1: with Thai generals. But we know a lot, and so 234 00:14:48,760 --> 00:14:51,440 Speaker 1: this could have been the one case where we did it, 235 00:14:51,440 --> 00:14:54,000 Speaker 1: and instead the Malaysian government just stuck the bill to 236 00:14:54,120 --> 00:14:57,680 Speaker 1: its people. Although now I think, you know, after the 237 00:14:57,800 --> 00:15:03,120 Speaker 1: US prosecutors have gone after the Joel's assets, the Malaysian 238 00:15:03,160 --> 00:15:05,880 Speaker 1: government is saying, you know, Goldman Sachs should pay the bill. 239 00:15:06,320 --> 00:15:08,840 Speaker 1: But I'm skeptical that they're really going to be able 240 00:15:08,880 --> 00:15:11,560 Speaker 1: to stick them with the whole bill. Yeah, they are 241 00:15:11,600 --> 00:15:14,040 Speaker 1: going after golden sacks, and it will be interesting to 242 00:15:14,080 --> 00:15:17,920 Speaker 1: see that one play out in the US judiciary system 243 00:15:17,960 --> 00:15:21,440 Speaker 1: and actually judiciary systems around the world. Now, But Mitto, 244 00:15:21,560 --> 00:15:26,080 Speaker 1: you touched on this um a few minutes ago. Governments 245 00:15:26,160 --> 00:15:30,760 Speaker 1: that did choose to repudiate debt under this you know, 246 00:15:31,000 --> 00:15:35,680 Speaker 1: odious debt doctrine up. How many of those have we seen? 247 00:15:35,760 --> 00:15:39,640 Speaker 1: Can you name some specific examples? Well, yes, there are 248 00:15:39,680 --> 00:15:44,000 Speaker 1: some very famous examples that, in fact the repudiations are 249 00:15:44,120 --> 00:15:52,120 Speaker 1: still in existence. So the Revolutionary government in Russia post 250 00:15:52,280 --> 00:15:55,280 Speaker 1: the Czar I think, I mean, my history is fuzzy, 251 00:15:55,360 --> 00:16:00,560 Speaker 1: nineteen seventeen. Uh, they still haven't. Those bonds are still standing. 252 00:16:00,680 --> 00:16:04,440 Speaker 1: So if you go to London to an antique store, 253 00:16:04,480 --> 00:16:07,960 Speaker 1: you can probably buy for a couple of pounds old 254 00:16:08,040 --> 00:16:11,440 Speaker 1: Russian bond that in theory is still a valid obligation 255 00:16:11,520 --> 00:16:18,400 Speaker 1: of the Russian government, and the successor Russian governments, including Mr. Putin, 256 00:16:18,920 --> 00:16:21,400 Speaker 1: have refused to pay that on the grounds that it 257 00:16:21,520 --> 00:16:25,160 Speaker 1: is an odious debt of the Czarist government. The same 258 00:16:25,240 --> 00:16:28,560 Speaker 1: for the Imperial government in China. Those debts still have 259 00:16:28,720 --> 00:16:33,160 Speaker 1: not been paid their outstanding debts, but successor governments have 260 00:16:33,400 --> 00:16:38,280 Speaker 1: refused to pay them. Now, the question though, is whether 261 00:16:38,320 --> 00:16:42,360 Speaker 1: a court in the US, in particular, since US basically 262 00:16:42,440 --> 00:16:45,640 Speaker 1: is US and the UK are the world's governments in 263 00:16:45,760 --> 00:16:50,120 Speaker 1: terms of which court systems government these laws would recognize 264 00:16:50,200 --> 00:16:54,760 Speaker 1: such a debt. And no court has recognized, I mean, 265 00:16:54,800 --> 00:16:58,680 Speaker 1: recognize such a defense. No court has recognized the defense. 266 00:16:59,000 --> 00:17:02,120 Speaker 1: And these are two very very powerful countries that creditors 267 00:17:02,640 --> 00:17:05,960 Speaker 1: can't easily seize their assets. Although there are some classic 268 00:17:06,000 --> 00:17:10,400 Speaker 1: cases where creditors have, for example, tried to seize uh, 269 00:17:10,480 --> 00:17:13,480 Speaker 1: you know, Russian paintings that are on tour around the world, 270 00:17:13,720 --> 00:17:18,600 Speaker 1: or you know, airlines flying the president and things like that, 271 00:17:18,720 --> 00:17:22,280 Speaker 1: but none have really succeeded. And so those are the 272 00:17:22,320 --> 00:17:26,960 Speaker 1: two most famous examples of successor government saying the predecessor 273 00:17:27,040 --> 00:17:30,679 Speaker 1: government was just so evil and the purposes of the loans, 274 00:17:31,280 --> 00:17:34,320 Speaker 1: you know, for example, the Chinese railroad loans that were 275 00:17:34,880 --> 00:17:39,040 Speaker 1: you know, largely engineered so that the Western powers could 276 00:17:39,920 --> 00:17:43,240 Speaker 1: you know, divide up China into different spheres of influence, 277 00:17:43,960 --> 00:17:47,800 Speaker 1: were you know, illegitimate, and we were throwing out the 278 00:17:47,800 --> 00:18:08,720 Speaker 1: Western devils. So we're not going to pay them. Let's 279 00:18:08,720 --> 00:18:14,160 Speaker 1: talk about some modern examples then, Um, some ongoing cases 280 00:18:14,320 --> 00:18:18,480 Speaker 1: of bad bonds, and you know bad in many senses 281 00:18:18,560 --> 00:18:21,320 Speaker 1: of the words. So you mentioned one already, which is 282 00:18:21,359 --> 00:18:25,679 Speaker 1: tuna bonds in Mozambique. There's another big one, which I 283 00:18:25,720 --> 00:18:28,760 Speaker 1: think would have to be Venezuela. Which one do you 284 00:18:28,760 --> 00:18:31,680 Speaker 1: want to start with? Oh, I don't know. Those are 285 00:18:31,800 --> 00:18:35,200 Speaker 1: the hunger bonds from Venezuela and the tuna bands from 286 00:18:35,240 --> 00:18:39,000 Speaker 1: Mozambique are two of the most vivid cases that we've 287 00:18:39,040 --> 00:18:42,919 Speaker 1: seen in years, and so I I hate to delight 288 00:18:43,000 --> 00:18:46,600 Speaker 1: in them because they're really sad from the perspective of 289 00:18:46,840 --> 00:18:49,760 Speaker 1: the people of those two countries. But why why don't 290 00:18:49,800 --> 00:18:54,199 Speaker 1: we start with the tuna bonds since it's it's in 291 00:18:54,240 --> 00:18:58,320 Speaker 1: the news literally this week and last week, and it's 292 00:18:58,359 --> 00:19:01,959 Speaker 1: so vivid. It may be the it may even be 293 00:19:02,000 --> 00:19:04,639 Speaker 1: worse than a one the one MDB scandal, because I 294 00:19:04,680 --> 00:19:07,399 Speaker 1: think even in the one MDB scandal there were a 295 00:19:07,440 --> 00:19:11,400 Speaker 1: few dollars in the pot. What happened here, I think 296 00:19:11,440 --> 00:19:15,760 Speaker 1: it was about three years ago, was that the Mosa 297 00:19:15,960 --> 00:19:20,040 Speaker 1: Mozambiques economy had begun to do a little bit better. 298 00:19:20,080 --> 00:19:22,959 Speaker 1: You know, it's a very poor country, so much so 299 00:19:23,000 --> 00:19:26,000 Speaker 1: that Mozambique had never been able to issue a euro 300 00:19:26,080 --> 00:19:30,560 Speaker 1: bond and tap the international financial markets. But as the 301 00:19:30,640 --> 00:19:36,000 Speaker 1: first step to tapping the markets, they decided, along with 302 00:19:36,040 --> 00:19:41,080 Speaker 1: the help of Credit Suite and v TB, a Russian 303 00:19:41,080 --> 00:19:44,600 Speaker 1: bank that is very important in almost all of the 304 00:19:44,680 --> 00:19:50,560 Speaker 1: modern stories of corruption, they decided, we'll do alon. We'll 305 00:19:50,560 --> 00:19:55,240 Speaker 1: do a loan to help us buy both enaval boats 306 00:19:55,280 --> 00:19:57,600 Speaker 1: and tuna boats. Since tuna is a big part of 307 00:19:57,600 --> 00:20:00,280 Speaker 1: our industry. We're going to take a loan and we're 308 00:20:00,280 --> 00:20:04,679 Speaker 1: gonna buy tuna boats to help our economy. And the 309 00:20:04,920 --> 00:20:09,479 Speaker 1: sort of they do this these three big loans, and 310 00:20:09,560 --> 00:20:16,600 Speaker 1: they back the loans with state guarantees, and almost immediately, 311 00:20:18,000 --> 00:20:21,960 Speaker 1: literally before the first couple of interest payments have to 312 00:20:22,000 --> 00:20:25,920 Speaker 1: be made, they run out of money. And they run 313 00:20:25,920 --> 00:20:29,680 Speaker 1: out of money in part because none of the boats 314 00:20:29,680 --> 00:20:33,320 Speaker 1: ever get used, and almost no money. I mean, I 315 00:20:33,320 --> 00:20:35,439 Speaker 1: think they can't find even a single dollar of the 316 00:20:35,480 --> 00:20:41,400 Speaker 1: proceeds of these loans that went to the Mozambique government. Right, So, 317 00:20:41,520 --> 00:20:44,400 Speaker 1: from what I remember, the allegations and these are still 318 00:20:44,440 --> 00:20:48,440 Speaker 1: being investigated, but the allegations are that Mozambique government officials 319 00:20:48,760 --> 00:20:51,840 Speaker 1: basically we're siphoning off millions of dollars that were meant 320 00:20:51,880 --> 00:20:56,119 Speaker 1: to be going into the Mozambique economy, like the tuna industry, 321 00:20:56,359 --> 00:21:00,720 Speaker 1: through these financings. I taught a class on sovereign debt 322 00:21:00,760 --> 00:21:05,679 Speaker 1: restructuring in Portugal to a small group of sort of 323 00:21:05,800 --> 00:21:08,680 Speaker 1: young government officials who were going to be working on 324 00:21:08,800 --> 00:21:12,159 Speaker 1: these deals. And this was before or right around the 325 00:21:12,200 --> 00:21:15,840 Speaker 1: time I think the first um scoop came out in 326 00:21:15,920 --> 00:21:19,560 Speaker 1: the Western financial press about these tuna bonds, not ever 327 00:21:19,640 --> 00:21:24,760 Speaker 1: having caught a single tuna. These government officials, they didn't 328 00:21:24,800 --> 00:21:28,080 Speaker 1: know about the articles in the western press, but they 329 00:21:28,119 --> 00:21:33,560 Speaker 1: were officials from the Mozambique government, young people, and they said, look, 330 00:21:33,680 --> 00:21:35,600 Speaker 1: you know, we can look out our windows and we 331 00:21:35,760 --> 00:21:38,960 Speaker 1: just see these boats sitting there and they never go 332 00:21:39,040 --> 00:21:43,119 Speaker 1: out into the water, and where's all that money gone. 333 00:21:44,480 --> 00:21:49,120 Speaker 1: And then what happens is every single one of these 334 00:21:49,240 --> 00:21:55,760 Speaker 1: defaults and no money goes into Mozambique. Mozambique goes quickly 335 00:21:56,000 --> 00:21:59,760 Speaker 1: from having fairly good fiscal position for such a poor 336 00:22:00,000 --> 00:22:03,280 Speaker 1: country to be becoming one of the most indebted countries 337 00:22:03,320 --> 00:22:06,520 Speaker 1: in the world. We thought having gotten a single dollar 338 00:22:06,600 --> 00:22:12,080 Speaker 1: of benefit. Now the original loans were eventually again from 339 00:22:12,080 --> 00:22:15,400 Speaker 1: what I remember, they were swapped into euro bonds, right 340 00:22:15,520 --> 00:22:19,280 Speaker 1: because they still had that government guarantee which was valuable 341 00:22:19,359 --> 00:22:23,680 Speaker 1: to investors. And in fact, I think this was Mozambique's 342 00:22:23,720 --> 00:22:27,920 Speaker 1: first euro bond, and I remember it was being pitched 343 00:22:28,359 --> 00:22:30,240 Speaker 1: at the time. There were a lot of people saying 344 00:22:30,280 --> 00:22:33,760 Speaker 1: it was an excellent way to get yield via frontier 345 00:22:33,800 --> 00:22:38,159 Speaker 1: market exposure to Mozambique. A loan that have could have 346 00:22:38,240 --> 00:22:43,120 Speaker 1: been easily repudiated the prior ones where the original lenders 347 00:22:43,160 --> 00:22:46,520 Speaker 1: were still in place, and you know, it could probably 348 00:22:46,520 --> 00:22:49,480 Speaker 1: could have identified them, or at least the state could 349 00:22:49,480 --> 00:22:52,040 Speaker 1: have said, at least our guarantee that we put on it, 350 00:22:52,320 --> 00:22:54,600 Speaker 1: we're taking that off and you can chase out the 351 00:22:54,640 --> 00:22:57,679 Speaker 1: tuna company if you want. But we as we both know, 352 00:22:57,760 --> 00:23:00,560 Speaker 1: there's nothing in the tuna company for any creditor to 353 00:23:00,600 --> 00:23:03,879 Speaker 1: go after. But once they converted it into a nice 354 00:23:03,920 --> 00:23:08,240 Speaker 1: tradeable Mozambique euro bond, then the country was on the 355 00:23:08,280 --> 00:23:11,800 Speaker 1: hook for it. And then there would be new lenders 356 00:23:11,840 --> 00:23:15,440 Speaker 1: who are buying traded instruments and it would be near 357 00:23:15,560 --> 00:23:19,440 Speaker 1: impossible to repudiate that. So, you know, one of these 358 00:23:19,480 --> 00:23:22,800 Speaker 1: things with both with the one MDB scandal and with 359 00:23:22,920 --> 00:23:29,520 Speaker 1: the Tuna bonds scandal is that you see how even 360 00:23:29,680 --> 00:23:34,479 Speaker 1: things that legally you could repudiate can be converted if 361 00:23:34,560 --> 00:23:38,840 Speaker 1: the government in place is not strong enough to want 362 00:23:38,880 --> 00:23:43,400 Speaker 1: to repudiate it, they can be converted into much prettier 363 00:23:43,960 --> 00:23:49,480 Speaker 1: and safer instruments that are protected from legal attack. And 364 00:23:49,600 --> 00:23:51,560 Speaker 1: that's what we've seen. I mean, that's the really sad 365 00:23:51,680 --> 00:23:54,800 Speaker 1: part of these stories. Now, even in the Tuna bonds, 366 00:23:54,920 --> 00:23:58,440 Speaker 1: you know, US prosecutors are going after the bad guys, 367 00:23:58,480 --> 00:24:02,520 Speaker 1: but that never works because getting bad guys assets is 368 00:24:02,600 --> 00:24:06,040 Speaker 1: just very difficult. They don't have that many assets. They 369 00:24:06,480 --> 00:24:09,480 Speaker 1: tend to spend it all. And you know, it also 370 00:24:09,600 --> 00:24:11,720 Speaker 1: tends to be the fact that in many of these 371 00:24:11,720 --> 00:24:15,200 Speaker 1: corrupt situations, it's not just one bad guy. There are 372 00:24:15,280 --> 00:24:17,800 Speaker 1: hundreds of people who have been taking and we never 373 00:24:17,880 --> 00:24:21,920 Speaker 1: catch them all, and so the people invariably get stuck 374 00:24:22,040 --> 00:24:27,359 Speaker 1: with the bill. Well, let's talk about another instance of 375 00:24:27,760 --> 00:24:31,600 Speaker 1: well bad behavior, I guess in the debt market. Venezuela 376 00:24:32,000 --> 00:24:35,200 Speaker 1: and the Hunger bonds has to be a major major 377 00:24:35,240 --> 00:24:37,760 Speaker 1: example of this. And you know, we were talking about 378 00:24:38,520 --> 00:24:42,440 Speaker 1: why governments would choose to honor or not honor their 379 00:24:42,480 --> 00:24:46,600 Speaker 1: debt earlier, and one of the weird and unusual and 380 00:24:46,840 --> 00:24:50,960 Speaker 1: very sad things about Venezuela's that even as ordinary Venezuelans 381 00:24:50,960 --> 00:24:55,440 Speaker 1: were starving, the Maduro regime, you know, continue to repay 382 00:24:55,480 --> 00:24:58,720 Speaker 1: its debt for a very very long time, you know, 383 00:24:58,840 --> 00:25:02,400 Speaker 1: longer than a lot of people had expected. So why 384 00:25:02,480 --> 00:25:05,320 Speaker 1: would they choose to do that? And what's the future 385 00:25:05,600 --> 00:25:09,439 Speaker 1: of the bonds issued under the Maduro regime? Okay, so 386 00:25:10,640 --> 00:25:16,800 Speaker 1: the hunger pond is another astounding I mean two two 387 00:25:17,280 --> 00:25:22,440 Speaker 1: nineteen must be the years of corrupt sovereign debt issuances. 388 00:25:22,520 --> 00:25:28,200 Speaker 1: But um, the Maduro government. You know that Venezuela has 389 00:25:28,359 --> 00:25:32,400 Speaker 1: the largest oil reserves in the world, so it's incredibly rich. 390 00:25:32,480 --> 00:25:37,480 Speaker 1: And one of the effects of being so resource riches 391 00:25:37,760 --> 00:25:42,879 Speaker 1: even though they have this basically cleptocratic government in place, 392 00:25:43,680 --> 00:25:48,760 Speaker 1: foreign investors are willing to invest in their bonds in 393 00:25:48,760 --> 00:25:53,800 Speaker 1: incredibly large amounts because they expect that some future governments 394 00:25:53,880 --> 00:25:58,800 Speaker 1: sometime will come in and revive the economy and then 395 00:25:58,840 --> 00:26:03,120 Speaker 1: be able to pay them all. So Venezuela, unlike Mozambique 396 00:26:03,200 --> 00:26:06,840 Speaker 1: or even Malaysia, has sort of the resource curse of 397 00:26:07,440 --> 00:26:12,440 Speaker 1: investors are willing to keep plowing money in uh no 398 00:26:12,480 --> 00:26:16,080 Speaker 1: matter what. And on the flip side of it, the government, 399 00:26:16,520 --> 00:26:19,359 Speaker 1: because it is dependent on the money from the investors, 400 00:26:19,359 --> 00:26:22,600 Speaker 1: on new money from the investors, is willing to keep 401 00:26:22,720 --> 00:26:28,080 Speaker 1: paying the coupons on the old loans as long as 402 00:26:28,119 --> 00:26:33,040 Speaker 1: it can, just so as to continue to keep its 403 00:26:33,160 --> 00:26:36,880 Speaker 1: connection to the financing markets. So that's sort of the 404 00:26:36,960 --> 00:26:40,560 Speaker 1: cycle that they get into in Venezuela. And it is 405 00:26:40,640 --> 00:26:45,960 Speaker 1: why um the economist at Harvard, Ricardo Houseman, started calling 406 00:26:46,000 --> 00:26:50,919 Speaker 1: these hunger bonds, because people in Venezuela were, you know, malnourished, 407 00:26:50,960 --> 00:26:54,720 Speaker 1: not getting medication, while at the same time the government 408 00:26:54,840 --> 00:26:58,080 Speaker 1: is paying out millions of dollars because Venezuela has such 409 00:26:58,080 --> 00:27:02,000 Speaker 1: a large debt stock in coop on payments to foreign investors. 410 00:27:02,640 --> 00:27:05,560 Speaker 1: So Venezuela for a number of years had been the 411 00:27:05,600 --> 00:27:10,480 Speaker 1: best performing emerging markets sovereign it by a wide margin. 412 00:27:10,600 --> 00:27:14,080 Speaker 1: I think. So Venezuelan people are starving, and yet you know, 413 00:27:14,119 --> 00:27:17,760 Speaker 1: if you buy Venezuelan bonds, you're having a giant party. 414 00:27:18,000 --> 00:27:21,439 Speaker 1: So this one bond, but but this all, you know, 415 00:27:21,480 --> 00:27:24,239 Speaker 1: this all eventually comes crashing down because the government is 416 00:27:24,440 --> 00:27:26,840 Speaker 1: just so incompetent that it can't even run its own 417 00:27:26,840 --> 00:27:31,800 Speaker 1: oil industry properly. And they stop being able to make 418 00:27:31,920 --> 00:27:36,560 Speaker 1: even their coupon payments. But then the government comes up 419 00:27:36,600 --> 00:27:40,840 Speaker 1: with a new strategy, and their new strategy is, look, 420 00:27:42,320 --> 00:27:45,760 Speaker 1: you know, we can't raise new bonds on the international market. 421 00:27:47,640 --> 00:27:51,120 Speaker 1: You know, nobody will underwrite our bonds. So what we'll 422 00:27:51,119 --> 00:27:53,720 Speaker 1: do is we've got some old bonds that we weren't 423 00:27:53,720 --> 00:27:57,159 Speaker 1: able to sell to anybody, and we had you know, 424 00:27:57,280 --> 00:28:00,800 Speaker 1: parked them in local financial institutions, but never raised any 425 00:28:00,800 --> 00:28:04,399 Speaker 1: money for those. What we'll do is we will find 426 00:28:04,720 --> 00:28:09,879 Speaker 1: some investors out there. And now, because we're basically bankrupt, 427 00:28:10,280 --> 00:28:14,480 Speaker 1: we can't promise investors high interest rates because if you're 428 00:28:14,480 --> 00:28:16,720 Speaker 1: going to go bankrupt, nobody wants a high interest rate 429 00:28:16,760 --> 00:28:20,360 Speaker 1: because once you go into bankruptcy or basically an insolvency proceeding, 430 00:28:20,760 --> 00:28:22,520 Speaker 1: you don't get to pay. You don't get paid that 431 00:28:22,640 --> 00:28:26,439 Speaker 1: high interest rate. The game then is what you have 432 00:28:26,520 --> 00:28:29,240 Speaker 1: to promise me is that I will get priority over 433 00:28:29,320 --> 00:28:33,640 Speaker 1: the other lenders, the prior lenders. Now in sovereign debt, 434 00:28:33,680 --> 00:28:37,119 Speaker 1: if you get really into the weeds, there's no priority 435 00:28:37,200 --> 00:28:40,720 Speaker 1: promise because there's no bankruptcy system. But the way to 436 00:28:40,880 --> 00:28:45,680 Speaker 1: use financial engineering to get priority is to give somebody 437 00:28:45,720 --> 00:28:50,720 Speaker 1: a dramatically inflated claim. So it's as if you know, you, Tracy, 438 00:28:52,200 --> 00:28:57,120 Speaker 1: are willing to lend me, you know, a hundred million dollars, 439 00:28:58,640 --> 00:29:01,000 Speaker 1: but you don't want to hire interest rate. And I'm 440 00:29:01,080 --> 00:29:04,880 Speaker 1: very risky. So the way I do that is I say, look, Tracy, 441 00:29:04,920 --> 00:29:07,160 Speaker 1: give me the hundred million dollars. I'll give you a 442 00:29:07,160 --> 00:29:10,480 Speaker 1: piece of paper that says on it a billion dollars. 443 00:29:11,680 --> 00:29:14,560 Speaker 1: So when when I eventually go bankrupt and when I 444 00:29:14,640 --> 00:29:17,400 Speaker 1: have taken my ill gotten gains and gone to Switzerland, 445 00:29:17,640 --> 00:29:20,640 Speaker 1: and you come to the new government and turn in 446 00:29:20,720 --> 00:29:24,600 Speaker 1: your claim for the restructuring, they will think you are 447 00:29:24,640 --> 00:29:30,280 Speaker 1: owed a billion dollars. And essentially with the Hunger bonds, 448 00:29:30,320 --> 00:29:34,719 Speaker 1: that's what happens. They give this one bond issue. I 449 00:29:34,720 --> 00:29:37,440 Speaker 1: did think it was a two point two billion dollar issue, 450 00:29:38,360 --> 00:29:44,320 Speaker 1: and I can't remember two point two billion, but I 451 00:29:44,360 --> 00:29:48,200 Speaker 1: think the actual amount that Venezuela gets is close to 452 00:29:48,360 --> 00:29:53,400 Speaker 1: eight hundred million dollars. And so the Venezuelan government, you 453 00:29:53,440 --> 00:29:56,240 Speaker 1: can look at their capital reserves and on the roughly 454 00:29:56,280 --> 00:29:58,280 Speaker 1: around the day of the bond is you know, this 455 00:29:58,440 --> 00:30:02,640 Speaker 1: parked bond is is is sold, their capital reserves go out, 456 00:30:02,800 --> 00:30:05,720 Speaker 1: go up by exactly this amount with a little discount 457 00:30:05,720 --> 00:30:10,480 Speaker 1: for whoever got the side payment um. And this hits, 458 00:30:10,720 --> 00:30:16,240 Speaker 1: This hits the press through social media, and it spreads 459 00:30:16,320 --> 00:30:21,840 Speaker 1: like wildfire under the name of the Hunger bond, and 460 00:30:21,920 --> 00:30:26,280 Speaker 1: Marco Rubio tweets it out, and Ricardo Housman tweets it out, 461 00:30:26,920 --> 00:30:32,640 Speaker 1: and everybody's outraged, and the market starts penalizing this bond 462 00:30:33,200 --> 00:30:36,440 Speaker 1: very very heavily. So in some ways this is a 463 00:30:36,560 --> 00:30:42,600 Speaker 1: story both of the kinds of things that bad governments 464 00:30:42,640 --> 00:30:46,240 Speaker 1: do in order to preserve their power, but for once, 465 00:30:46,360 --> 00:30:51,200 Speaker 1: this is also a story of how social media can, 466 00:30:51,840 --> 00:30:54,080 Speaker 1: you know, if if people understand what sort of bad 467 00:30:54,080 --> 00:30:57,640 Speaker 1: stuff is going on, end up sort of stopping the 468 00:30:57,720 --> 00:31:00,360 Speaker 1: bad deals. And you know, in the in the this case, 469 00:31:00,440 --> 00:31:03,480 Speaker 1: the happy part of it is Wall Street took such 470 00:31:03,520 --> 00:31:08,040 Speaker 1: a beating for having done this deal that basically every 471 00:31:08,120 --> 00:31:12,120 Speaker 1: major investment bank, including institutions like Credit Suites that were 472 00:31:12,160 --> 00:31:15,640 Speaker 1: involved in the Tuna bond, promise not to touch this 473 00:31:15,720 --> 00:31:20,520 Speaker 1: bond and not not not to do these kinds of deals. Again, Well, 474 00:31:20,560 --> 00:31:22,760 Speaker 1: I want to press you on this point because I 475 00:31:22,760 --> 00:31:24,400 Speaker 1: think this is going to be the thing that sort 476 00:31:24,400 --> 00:31:27,000 Speaker 1: of links all these different stories that we've been talking 477 00:31:27,040 --> 00:31:30,000 Speaker 1: about together, you know, whether it's one MDB or Tuna 478 00:31:30,040 --> 00:31:34,120 Speaker 1: bonds and Mozambique or Hunger bonds in Venezuela. But what 479 00:31:34,200 --> 00:31:39,360 Speaker 1: do you think is the most effective way of dealing 480 00:31:39,480 --> 00:31:44,960 Speaker 1: with sovereign debts bad sovereign debts incurred by corrupt leaders 481 00:31:45,200 --> 00:31:50,520 Speaker 1: or you know, through unsavory actions or questionable governments. How 482 00:31:50,560 --> 00:31:56,560 Speaker 1: how can people actually deal with those I liked talking 483 00:31:56,600 --> 00:31:59,920 Speaker 1: about the stories because I had stuff to say about that. 484 00:32:00,440 --> 00:32:04,320 Speaker 1: Now you are pointing to you are asking the question 485 00:32:04,400 --> 00:32:08,400 Speaker 1: that I don't actually don't have a good answer for. 486 00:32:08,680 --> 00:32:12,120 Speaker 1: We have been working on this for years, as long 487 00:32:12,160 --> 00:32:14,160 Speaker 1: as I have been in this business, and how to 488 00:32:14,320 --> 00:32:20,800 Speaker 1: devise a system to improve the sort of the quality 489 00:32:20,840 --> 00:32:24,360 Speaker 1: of sovereign debt borrowing and in particular to reduce the 490 00:32:24,360 --> 00:32:30,200 Speaker 1: amount of corrupt borrowing, and we have largely failed. I 491 00:32:30,240 --> 00:32:35,720 Speaker 1: think the best suggestion out there, and especially drawing from 492 00:32:35,760 --> 00:32:39,320 Speaker 1: the Hunger bond experience, unfortunately, is not one that I 493 00:32:39,440 --> 00:32:43,040 Speaker 1: came up with, but it is one that Ricardo Housman 494 00:32:43,120 --> 00:32:47,560 Speaker 1: and Ugo Panizza, these two economists have been talking about, 495 00:32:48,120 --> 00:32:52,960 Speaker 1: and which is to do early in the process of 496 00:32:52,960 --> 00:32:56,520 Speaker 1: bond issuances a kind of an odious nous rating for 497 00:32:56,560 --> 00:33:01,040 Speaker 1: the bond, where you would really use the ability of 498 00:33:01,080 --> 00:33:05,000 Speaker 1: the financial markets to rate bonds in terms of how 499 00:33:05,160 --> 00:33:09,600 Speaker 1: corrupt the particular bond issuances or the process of bond issuance, 500 00:33:10,080 --> 00:33:14,120 Speaker 1: for example, whether or not they got proper legislative approval, 501 00:33:14,760 --> 00:33:18,040 Speaker 1: um was audited properly, because all of these situations that 502 00:33:18,080 --> 00:33:20,840 Speaker 1: we're talking about, if in hindsight we go back and 503 00:33:20,880 --> 00:33:25,000 Speaker 1: look at them, they were all filled with very clear 504 00:33:25,120 --> 00:33:28,480 Speaker 1: markers that this was not done properly. It's just in 505 00:33:28,520 --> 00:33:31,880 Speaker 1: all of these cases we've only discovered them well after 506 00:33:31,960 --> 00:33:34,680 Speaker 1: the fact. But if we had some kind of public 507 00:33:34,760 --> 00:33:39,560 Speaker 1: rating systems that are public rating system that investors could 508 00:33:39,600 --> 00:33:42,760 Speaker 1: actually look at, then maybe we would have a market 509 00:33:42,840 --> 00:33:47,640 Speaker 1: mechanism to do what the court systems and the existing 510 00:33:47,720 --> 00:33:52,440 Speaker 1: international you know, financial standard system has not been able 511 00:33:52,480 --> 00:33:56,880 Speaker 1: to do. But you know, it's just a conjecture. I 512 00:33:56,880 --> 00:33:58,800 Speaker 1: I mean, in my work, the stuff that I have 513 00:33:58,960 --> 00:34:02,720 Speaker 1: tried to work on in terms of you know, uh, 514 00:34:04,200 --> 00:34:07,920 Speaker 1: sort of putting in place legal mechanisms in the courts 515 00:34:07,960 --> 00:34:11,440 Speaker 1: has utterly failed. So I have to turn here to 516 00:34:11,480 --> 00:34:13,799 Speaker 1: the work of other people, which of course pains me 517 00:34:13,880 --> 00:34:15,640 Speaker 1: because I would like to turn to my own work. 518 00:34:16,280 --> 00:34:18,640 Speaker 1: All right, well, um, I think we're going to have 519 00:34:18,719 --> 00:34:21,719 Speaker 1: to leave it there, Minto. It's been so lovely to 520 00:34:21,800 --> 00:34:24,920 Speaker 1: talk to you again. And honestly I could talk to 521 00:34:24,920 --> 00:34:27,919 Speaker 1: you about sovereign debt for um, you know, many more 522 00:34:27,920 --> 00:34:30,799 Speaker 1: minutes and certainly hours, but it's all the time. We 523 00:34:30,880 --> 00:34:34,600 Speaker 1: have a Mitto Colate, professor of law at Duke University. 524 00:34:34,719 --> 00:34:37,840 Speaker 1: Thank you so much, Thank you so much, Tracy. It 525 00:34:37,920 --> 00:35:03,799 Speaker 1: was a real treat to tact to you. This has 526 00:35:03,840 --> 00:35:07,799 Speaker 1: been another episode of the Odd Thoughts podcast. You can 527 00:35:07,840 --> 00:35:11,240 Speaker 1: follow me on Twitter at Tracy Alloway. You can follow 528 00:35:11,320 --> 00:35:15,600 Speaker 1: my absentee co host Joe Wisenthal at The Stalwart. You 529 00:35:15,600 --> 00:35:19,800 Speaker 1: can also follow our producer Top Foreheads at Foreheads T 530 00:35:20,719 --> 00:35:24,239 Speaker 1: and you can follow our Bloomberg head of podcast, Francesco 531 00:35:24,320 --> 00:35:27,240 Speaker 1: Leavy at Francesca Today. Thanks for listening.