Slate Money – "The Bad Pac-Man" (July 25, 2020)

Episode Overview

In this episode, host Felix Salmon (Axios), with guests Lee Buchheit (sovereign debt restructuring legend), Mitu Gulati (Duke law professor and contracts expert), and Anna Szymanski (sovereign and emerging markets specialist), dive into how the COVID-19 crisis is affecting emerging markets. They analyze the pandemic-induced financial shock to developing economies, discuss current and future sovereign debt crises (with Brazil and Argentina as focal points), and dig into restructuring mechanics—including Argentina’s notorious “Pac-Man” debt strategy. The conversation is equal parts expert analysis and candid skepticism, grappling with market irrationality, legal innovation, and the lived implications for billions in the developing world.

Main Themes and Purpose

• The Pandemic's Disproportionate Impact: Not just the West, but the “6 billion” in developing countries are facing new debt realities, dwindling resources, and uncertain futures.
• Emerging Market Sovereign Debt: The trio unpacks why many emerging markets have managed to re-enter global capital markets and the risks hidden beneath the surface.
• Market Rationality (or Lack Thereof): Why are investors still lending? Does market access signal real recovery?
• Contractual Innovations and Failures: Examination of “conditional sovereign debt instruments,” and proposed, but rarely used, contract clauses for crises.
• Argentina as a Case Study: The guest experts dissect the Argentine default, focusing on the controversial “Pac-Man” strategy and its potential to reshape global restructuring norms.
• Broader Implications: What do these crises mean for global poverty reduction trends and future waves of sovereign distress?

Key Discussion Points & Insights

1. Sudden Stops and Market Recovery (02:33–04:55)

• Definition: “A sudden stop ... is a situation in which the private capital markets simultaneously and universally cease their willingness to lend to sovereign borrowers.” (Lee Buchheit, 02:52)
• The March 2020 pandemic shock initially froze markets, but surprisingly, many EM countries regained access to funding quickly.
• Speculated reasons for this recovery include:
  • Central bank liquidity/quantitative easing.
  • Developed market zero/negative interest rates pushing capital to riskier assets.
  • Assumptions of official sector bailouts for countries in distress.

Memorable Quote
“A little hard to know exactly why the market should have responded so munificently to a situation that is fraught with uncertainties.”
— Lee Buchheit (04:35)

2. The False Comfort of Market Access (05:23–08:44)

• Market funding does not mean countries like Brazil are “out of the woods.”

• Brazil’s costs (health care, exports, remittances, tourism) are rising while revenues contract.

• The experts express concern that the market seems more focused on short-term prospects than fundamentals.

• “I am not assured at all by the fact that the market bizarrely is willing to provide funding during these dark times.”
  — Mitu Gulati (06:39)

• The group laments the lack of innovative debt contract clauses to cushion crisis impacts (e.g., “COVID get-out-of-jail-free” clauses tied to economic or health triggers).

3. Why Don’t Countries Add Crisis Triggers to Their Debt? (08:44–13:53)

• Lee explains that sovereigns can, in theory, add “catastrophe” clauses (as with Caribbean hurricane clauses), but:
  • Markets demand a premium for such flexibility, which is too costly when countries are already desperate.
  • Political short-termism also inhibits meaningful reform.

Quote
“You’ve got to pay the premium and that’s the very human inhibition.”
— Lee Buchheit (13:40)

• Anna summarizes: Both borrowers and lenders are “not thinking about the clear long-term implications.”

4. Brazil and the Spectrum of Crisis (13:53–19:32)

• Despite known risks, a major Brazilian sovereign default is unlikely soon because most debt is in local currency (reai).
• Yet, ugly scenarios are possible if global trade or Brazil’s recovery falter, which could trigger wider contagion.
• Mitu broadens the lens: Even countries managing COVID well (e.g., Kerala, India) face economic disaster due to remittance and tourism collapse.

Quote
“It’s that all of these countries are suffering major shocks right now ... we will be in that situation very quickly.”
— Mitu Gulati (18:09)

5. What’s Different This Time? (19:32–24:59)

• Lee: We’ve never seen a crisis so truly global, with so many countries losing revenue and remittances simultaneously.
• Anna: Previous global crises (e.g., 2008) were cushioned by China’s boom; that cushion is absent now.

Quote
“We haven’t seen anything quite like this before.”
— Lee Buchheit (21:41)

• Both experts warn that underlying fundamentals are eroding, and unprecedented central bank support is merely buying time.

6. The End of Progress? (24:59–26:12)

• Felix: Does this spell the end of decades-long progress in poverty reduction?
• Lee: “We will certainly see ... a significant increase in the number of people living below the poverty line, at least for the near term.” (24:59)

7. Argentina’s “Bad Pac-Man” – A Case Study in Restructuring (26:12–35:10)

• Mitu: Argentina provides endless “astoundingly stupid moves” for law school casebooks.

  • The current drama centers on about $65 billion in foreign currency debt, with adversarial negotiations and failed proposals.

• Anna & Mitu explain Argentina’s “Pac-Man” debt restructuring strategy:

  • Use “redesignation” and serial voting, excluding dissenters from outcome tallies.
  • Add incremental sweeteners to sway more creditors, potentially rolling up opposition.

Quote
“This particular Pac-Man is very bad, in part because it doesn’t work very well and has the other effect of pissing everybody off.”
— Mitu Gulati (30:39)

• The panel agrees: This tactic sours relations, threatens to provoke lawsuits, and could backfire by making creditors insist on tougher contract terms globally, ironically making future restructurings harder.

8. Argentina’s Deeper Issues (35:10–43:34)

• Lee: Argentina’s century-long decline is more about politics and chronic fiscal mismanagement than debt fights alone.
• Anna: Historical legacies (oligopolies, Peronist policies) have created unsustainable economic models that are hard to unwind.
• Lee: The collective memory of “corralitos” (forced conversion of dollar deposits to pesos) means domestic capital never trusts the system, fueling capital flight and persistent vulnerability.

Quote
“Old sins cast long shadows.”
— Lee Buchheit (38:52)

• Despite these issues, Lee holds “optimism” that a deal will be struck between Argentina and creditors, as both sides’ demands have narrowed considerably.

9. Numbers Round & Predictions (44:52–51:24)

Major Numbers and Takeaways:

• Mitu: 2.875% – Brazil’s astonishingly low coupon rate for a June 2020 dollar bond issue (45:00).

• Anna: 9.63 × 10²⁶% – The world record for annualized inflation (Hungary, 1946; 46:08).

• Felix: -4.9% – IMF’s 2020 global growth forecast, highlighting a contraction “off the charts” (47:18).

• Lee: 1 – Probability that 20+ countries will be in debt distress by mid-2021 (48:03).

  • Lee notes already 41 poor countries have applied for Paris Club debt suspension, suggesting the crisis is spreading widely, with potential for middle-income countries to join in.

Notable Quotes

• “A sudden stop ... is a situation in which the private capital markets more or less simultaneously and universally cease their willingness to lend to sovereign borrowers.”
  — Lee Buchheit (02:52)

• “Markets are providing funding ... but that’s not enough ... I think we’re going down a very steep cliff.”
  — Mitu Gulati (06:39)

• “You’ve got to pay the premium and that’s the very human inhibition.”
  — Lee Buchheit (13:40)

• “This particular Pac-Man is very bad, in part because it doesn’t work very well and has the other effect of pissing everybody off.”
  — Mitu Gulati (30:39)

• “Old sins cast long shadows.”
  — Lee Buchheit (38:52)

• “I reckon that is the probability that by this time next year we will have at least 20 countries in debt distress and forced to seek a rearrangement of their external debt.”
  — Lee Buchheit (48:03)

Segment Timestamps

• [00:10–02:52] – Introductions & crisis scope
• [02:52–08:44] – Sudden stops, capital flows, and irrational markets
• [08:44–13:53] – Contract clauses for crisis, and human short-termism
• [13:53–19:32] – Brazil, Kerala, global dominoes
• [19:32–24:59] – Nature of this unprecedented crisis & looming risks
• [24:59–26:12] – Global poverty progress faltering
• [26:12–35:10] – Argentina’s restructuring & Pac-Man tactics
• [35:10–43:34] – Deeper roots of Argentina’s decline
• [44:52–51:24] – Numbers round and global debt forecast

Overall Tone & Style

Candid, skeptical, and steeped in expert insight, the conversation blends deep technical knowledge with a wry sense of frustration at both markets and policymakers. There’s a palpable concern for emerging economies and a critical view of both structural flaws and incremental “solutions.” The episode is accessible but never dumbed down, with clear explanations, personal anecdotes, and ready humor.

Conclusion

This episode paints a sobering picture: The world’s poorer nations face mounting debt and dwindling options, even as markets act in frequently inexplicable ways. Sovereign debt contracts remain blunt tools—sometimes enabling, sometimes hampering crisis response. And, as Argentina’s case makes clear, legal sleights of hand can easily backfire, threatening to make the next crisis even harder to manage. The panel leaves listeners with a sense of urgency: Unless structural reforms and far-sighted crisis planning are embraced, we may be headed for a historic wave of sovereign defaults—and a reversal of decades of global poverty reduction.