Odd Lots Podcast Summary Episode: Mitu Gulati on Whether Trump Could Restructure US Debt
Release Date: April 18, 2025

Introduction

In this compelling episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the intricate world of sovereign debt restructuring with esteemed law professor Mitu Gulati from the University of Virginia. The conversation centers around the provocative question: Could former President Donald Trump realistically restructure U.S. debt? The discussion intertwines financial norms, legal frameworks, historical precedents, and speculative geopolitical maneuvers, providing listeners with a comprehensive analysis of a topic that blurs the lines between finance, law, and international relations.

Bonds: Beyond Finance and Legalities

Tracy Alloway initiates the discussion by reimagining bonds.

Tracy Alloway [01:20]:
"I think there's this perception that bonds are all about finance and legalities. They are these contracts, and borrowers have to stick to the contract, lenders have to stick to the contract. But actually, I like to look at bonds as more stories."

Tracy emphasizes that bonds are not merely financial instruments bound by rigid contracts but are narratives shaped by evolving norms and relationships between borrowers and lenders. This perspective sets the stage for exploring how these narratives can be manipulated or redefined, particularly in unprecedented political climates.

Joe Weisenthal [02:01]:
"It's about the tension of like, what's written on paper, what's technical, what does these words mean, et cetera versus Come on, that's not how we deal with bonds."

Joe echoes this sentiment, highlighting the friction between legalistic interpretations of bond agreements and the informal norms that often guide their execution. This tension is pivotal when considering potential debt restructuring scenarios.

Trump and Sovereign Debt Restructuring: The Mar-a-Lago Accord

The conversation shifts to the heart of the episode: the possibility of Donald Trump restructuring U.S. debt through mechanisms like the hypothetical Mar-a-Lago Accord.

Tracy Alloway [02:45]:
"Nothing is off the table when it comes to the Trump administration. So we should discuss."

Joe Weisenthal [03:20]:
"It feels like the entire world now operates in this system... introducing the idea of like, further taking seriously the idea of debt swaps, which to me sounds like default into the world."

Joe expresses ethical reservations about discussing such a restructuring, equating debt swaps to potential defaults. However, he acknowledges the necessity of addressing these ideas given their circulation in political discourse.

Tracy Alloway [04:28]:
"This is not an actual policy suggestion for the Trump administration, but we are going to talk about it."

Mitu Gulati [05:03]:
"I heard about it on one of your podcasts... swapping out short term US Treasuries for longer term low interest US Treasuries... that has become, I mean, that was, I think, implausible."

Mitu Gulati explains the concept of debt swaps, detailing how extending the maturities of existing Treasuries could be perceived as a way to manage national debt. She notes that while such ideas may seem far-fetched, they are garnering serious attention from market participants and legal experts.

Legal Implications and Historical Context

Mitu Gulati provides a deep dive into the legalities surrounding sovereign debt restructuring, drawing parallels with historical events.

Mitu Gulati [08:12]:
"Anybody and everybody who holds US Treasuries should go and look at the contract terms... we don't think you'll find anything, really."

She challenges the assumption that existing bond contracts inherently prevent such restructuring, suggesting that legal clauses may not explicitly forbid extending debt maturities.

Joe Weisenthal [09:22]:
"This blows my mind, 'cause to me if I'm a holder of U.S. treasuries... that sounds like default."

Mitu clarifies the nuances of default:

Mitu Gulati [09:22]:
"There are more, at least three different types of default... default on the contract... default for credit default swaps."

She elucidates that while altering bond terms might not constitute a breach of contract, it could trigger defaults in specific financial instruments like credit default swaps, depending on credit rating agencies' interpretations.

Mitu Gulati [10:45]:
"Okay. My students asked me this in class... the U.S. treasury Department and the Secretary of the treasury have authority to manage the maturities of U.S. treasuries."

She outlines the process and potential legal hurdles, referencing the historical abrogation of gold clauses in the 1930s, where the U.S. government successfully modified debt terms without triggering a market crash.

Tracy Alloway [15:20]:
"On why this didn't Happen. Like, why did the market seem to just go like, okay, this is unusual, but fine."

Mitu Gulati [15:28]:
"There are these rare instances where the market thinks... is necessary to make us all better... Greece in 2012..."

Mitu reflects on why past debt restructurings did not destabilize markets, suggesting that exceptional circumstances can lead to market acceptance of unconventional fiscal maneuvers.

The 14th Amendment and Debt Validity

A critical segment of the discussion revolves around the 14th Amendment of the U.S. Constitution and its implications for debt restructuring.

Joe Weisenthal [16:36]:
"What about 14th amendment section four that says the validity of the public debt of the United States authorized by law... should not be questioned?"

Mitu Gulati [17:05]:
"This language is so important... Let us just look at the language about the validity of the US debt."

She deciphers the amendment's language, explaining that while it affirms the legitimacy of publicly authorized debt, there is ambiguity regarding modifications like extending maturities.

Mitu Gulati [32:24]:
"The 14th Amendment... President could say, we're not challenging the validity. We're just extending the maturity."

This interpretation suggests that leveraging constitutional clauses could provide a legal shield for debt restructuring efforts, though the practical and political ramifications remain uncertain.

Collecting Historical Debts

The episode explores the feasibility of reclaiming historical debts, such as those owed by the United Kingdom after World War I.

Tracy Alloway [18:47]:
"Maybe the UK debt could cancel out some US debt... the norms come into play because... relations between the US and the UK are changing."

Mitu Gulati [18:52]:
"Legally, that is much more viable... using set off techniques... similar to Russia, Ukraine context..."

She discusses the concept of "set off," where debts between two nations can be balanced against each other, potentially nullifying mutual obligations. This approach, while legally plausible, navigates complex historical and political landscapes.

Mitu Gulati [24:44]:
"We don't even know... who knows what statute of limitations would be... This is a bonanza."

The speaker acknowledges the legal uncertainties and the depth of inquiry required to pursue such historical debt claims, highlighting both the opportunities and the complexities involved.

Modern Implications and Speculations

The conversation transitions to speculative scenarios, including potential territorial acquisitions and their financial implications.

Joe Weisenthal [25:28]:
"The idea that countries just acquiring land from other countries... how to think about this in the 21st century?"

Mitu Gulati [26:03]:
"Can’t avoid working this out... Greenland... offer to pay them each $1.5 million... it's brand new international law."

Mitu hypothesizes on the feasibility of purchasing territories like Greenland, blending historical debt restructuring techniques with modern geopolitical strategies. She speculates on the economic mechanisms that could underpin such acquisitions, including leveraging old debts to finance new territorial claims.

Tracy Alloway [35:26]:
"Maybe the US could use the proceeds from recouping payment on those old UK Bonds to buy Greenland."

This segment underscores the fluidity of financial instruments and international relations, suggesting that old debts could be repurposed to fund new geopolitical ambitions.

The Doctrine of Odious Debts and Revolutions

The episode concludes by examining the doctrine of odious debts and its relevance in scenarios involving revolutions and regime changes.

Tracy Alloway [29:25]:
"Talk about the repudiation of debt from the Soviet Union, also Imperial China... new government should not be saddled with debt from the previous administration."

Mitu Gulati [30:00]:
"The doctrine of odious debts... should the new government be responsible... if those creditors knew they were lending to a kleptocrat."

She explains that odious debts pertain to illicit or oppressive regimes where new administrations might seek to repudiate past obligations. This doctrine gains relevance in discussions about how modern governments might handle debts incurred under dubious circumstances.

Final Reflections

Tracy Alloway [38:29]:
"The whole conversation really highlights... how fluid some of these contracts actually can be... same applies to borders."

Joe and Tracy reflect on the overarching themes of the discussion, emphasizing the mutable nature of financial contracts and international boundaries, and how shifts in societal norms and political power can redefine these constructs.

Joe Weisenthal [38:46]:
"Countries are so new... almost every country is like it's basically day one around here."

This reflection ties back to the earlier discussion on the novelty of modern nation-states and the nascent stage of international financial and legal systems, highlighting the evolving landscape within which these debt and territorial issues play out.

Conclusion

This episode of Odd Lots navigates the complex interplay between financial instruments, legal frameworks, historical precedents, and speculative geopolitical strategies. With Mitu Gulati's expert insights, listeners gain a nuanced understanding of the potential for sovereign debt restructuring under unconventional leadership, the legal pathways that could facilitate such moves, and the broader implications for international finance and relations. The conversation serves as a thought-provoking exploration of how deeply intertwined finance is with law and politics, especially in times of crisis and change.

Notable Quotes:

• Tracy Alloway [01:20]:
  "Bonds are more stories... the narrative of who owes whom what and why."

• Joe Weisenthal [02:01]:
  "What's written on paper... versus Come on, that's not how we deal with bonds."

• Mitu Gulati [08:12]:
  "We have to be clear... There are different types of default."

• Joe Weisenthal [16:36]:
  "The validity of the public debt... should not be questioned."

• Mitu Gulati [26:03]:
  "No, we can get Greenland... it's brand new international law, but entirely plausible."

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