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- [00:10]
A
Hello, welcome to the Bad Pac man edition of Slate Money, your guide to the business and finance news of the entire planet. I'm Felix Salmon of Axios. We have an absolute stonker of an episode for you this week because for not the first time we have the dynamic emerging market expert duo of Libukheit and Mitu Gulati, not to mention Anna Shymansky. We are well in the wheelhouse of all of these people. We are going to talk about something we don't talk about enough really on Sleep Money, which is how is this crisis affecting the majority of the world, not just America, but basically the 6 billion people who live in developing countries and who often live in countries which have massive debts to in dollars that they're going to have difficulty repaying. We are going to talk about that, we are going to talk about Argentina and we are going to talk about Pac man. And you're just going to have to listen to the third segment in order to understand why Pac man is relevant. Me too. Introduce yourself. Who are you?
- [01:28]
B
I am a law professor at Duke University and I study obscure and old contracts and particularly the contracts that are relevant to restructuring. So I work in archives and in dungeons and I don't see the light of day very much. And definitely unlike my co author Lee Buchheit, I do not talk to world leaders about how to solve their problems on Caribbean beaches.
- [01:59]
A
Lee, you're coming to us from Caribbean beach. What are you up to these days?
- [02:06]
C
I'm coming to you from an old farmhouse 80 miles north of New York. I spend my time seemingly on the phone every day with the with some official sector players trying to figure out how we will all deal with the difficulties that this pandemic has brought upon the international financial system. And the rest of my time I assist Mitu Gulati in his noble work.
- [02:34]
A
So all that is coming up. We will solve the international financial systems problems, or failing that, at least diagnosed them on this episode of Slate Money. So let me start with this idea of a sudden stop. Lee, can you tell me what a sudden stop is?
- [02:53]
C
Yes. A sudden stop, Felix, is a situation in which the private capital markets more or less simultaneously and universally cease their willingness to lend to sovereign borrowers. And we saw it back in March where the markets turned arthritic in the face of the uncertainties of the pandemic. And many countries lost market access that had market access prior to that, lost it for a period of time.
- [03:34]
A
And this was terrifying because we have been through these sudden stop periods in the past. And they can completely devastate an economy. But this time around, it was shorter than some feared. They're getting their access back.
- [03:49]
C
Yes, some of them, even relatively low, lower rated sovereigns, have been able to re access the markets. And the reason for it is the subject of some speculation. Some people think that it's the byproduct of the staggering amounts of quantitative easing and liquidity that the central banks have put into the system. Some people think that it is a function of the fact that now virtually all developed country bonds are either zero interest rate or negative interest rate. Other people think that the behavior of the official sector generally in the crisis signals that there will be an official sector bailout for any countries that find themselves in deep distress. A little hard to know exactly why the market should have responded so munificently to a situation that is fraught with uncertainties.
- [04:55]
D
Yeah, I mean, I think this kind of question is for both Lee or me too. I'm kind of curious what you think about the actual position on the ground of a lot of these countries. Even if some of them do now have access, and not all countries have access, but a number of them do. Does that mean they're out of the woods? Does that mean that they should be able to get through this crisis without needing a tremendous amount of debt relief or debt freezes? What are your thoughts there?
- [05:23]
B
I don't think they are anywhere close to out of the woods. So take a country like Brazil. Brazil was able to borrow in the first week of June a few billion dollars. It's astonishing to me that they were able to borrow at the rates that they did. But their costs in terms of their health care, given the absolutely terrible job they've done dealing with COVID have just been increasing. The export markets have shrunk. Remittances that Brazil depends on to a significant extent have shrunk. And whatever tourism there was going on is down to zero. So the markets are providing funding, although just really, I mean, in Brazil's case, it's actually less than last year. But that's not enough. The costs are increasing precipitously. That's just one example. I think this is true across the board. I'm curious as to what Lee and Felix think about this, but I am not assured at all by the fact that the market bizarrely is willing to provide funding during these dark times that we are going in the right direction. I think we're going down a very steep cliff.
- [06:58]
A
So what would the right direction be, would you think, if things were going in the right direction. What would that look like?
- [07:07]
B
So the markets would provide borrowing in the rational hope that these countries are actually going to be able to recover. So what we would see then is that the market would be lending to the countries that are doing a good job of dealing with COVID and have good fundamentals that would give me some kind of reassurance that the markets are actually doing a good job of evaluating and that we can take assurance from market behavior. And also that we actually did have countries that were doing a good job of this. So that's why I am very worried about the direction we're going in. There's a second thing that I would hope to see and I am not seeing, which is that countries would be preparing in terms of their debt contracts for what's going to come. So let's say I'm a country that is in the middle of a really bad COVID 19 situation and that it's getting worse. I could put in place contractual clauses that say, look, if the costs from COVID 19 get even worse, a certain number of people die or our hospitals are overwhelmed, I am going to get debt relief from my creditors for a couple of years or for a year. Nobody has the least bit of interest in putting in place those kinds of precautionary clauses.
- [08:45]
A
So, I mean, I want to get Lee in here because he's the expert on putting clauses into sovereign debt contracts. No one's put more clauses into sovereign debt contracts than Lee, practically speaking. Is that within the realm of possibility? Lee, is it conceivable that a country could go along to its lawyers and its bankers in New York and say, hi, I want a Covid get out of jail free clause in my bonds. I would that ever happen.
- [09:17]
C
The constraint, Felix, is that the market would exact a price for that. So the minister of finance of that country would face the prospect of paying more in basis points in the interest rate for the bond today against the possibility that the insurance policy might be needed in the future?
- [09:44]
A
And realistically, it would be a lot more right. It wouldn't be 10 basis points. It would probably be like significant numbers of percentage points if they could get access at all.
- [09:55]
C
If it is focused on Covid, yes, there are precedents for this kind of clauses. Some years ago, we began to put into the bonds of Caribbean countries something that was called a hurricane clause. And what it said is, if there's a natural disaster, if there is a storm that reaches a certain level of severity, that the country can defer one or two coupon payments as it recovers from it. Those clauses never caught on until the Caribbean region developed a regional insurance policy that graded the severity of the storm. So there was an objective criterion to which you could look to say, yes, indeed, that storm was of a severity that it entitled the sovereign to defer payments. It was done because of course, in the Caribbean, while you cannot predict precisely when the hurricanes will hit in an actuarial sense, you can predict that a certain number of severe hurricanes will hit a particular area within every 10 years. And so there are precedents for this kind of clause to put one in in the middle of a crisis. However, I fear you may be right, Felix, that if the market had an appetite for it at all, it might be expensive. And of course, the additional expense is contraindicated when the Minister of Finance is raising money to try to deal with a liquidity problem forced upon them by the pandemic.
- [11:46]
D
Yeah, and I would also say kind of somewhat short term thinking is a bit of a hallmark of sovereign borrowing especially, and frankly on both sides, whether you're the one lending or you're the one borrowing, it's often this you think of, okay, what are things going to be like in a very, very short period of time? Not thinking about the clear long term implications and the clear long term debt sustainability now, then we're, when everything falls apart, then that becomes a different issue. But I can't say I'm really surprised at this. I mean, I'm probably surprised at the speed at which markets open back up, but kind of looking at the history of sovereign borrowing, it's not shocking to me that the countries are actually not pushing for more.
- [12:32]
C
This is one species under the broader genus of conditional sovereign debt instruments. You hear a lot of talk these days about GDP linked sovereign debt instruments, I.e. instruments that would automatically trigger a degree of debt relief, a deferment of payments, perhaps a reduction of coupons if the country's GDP declines below a specified level. And the thought is this is the equivalent of what the automobile industry tells you when they say we've put a crumpled zone in the front of your automobile. That is, you can, can hit a barrier at a certain speed and the engine won't be in your lap. But there's a very human aspect to it. The Minister of Finance asked to incorporate that feature into the bonds today, will pay for it in basis points. And the Minister knows that he or she is unlikely to be the beneficiary of it if ever the time comes when it has to be activated. So it is a kind of Insurance policy. But you've got to pay the premium and that's the very human inhibition.
- [13:54]
A
So I want to come back to this example of Brazil because I think it's a really good one. And I want to ask we have this massive continent sized economy without much if any crumpled zone attached to it, careering into quite possibly the worst Covid crisis in the world with a complete madman as a president, with exports falling off a cliff with as me too says, tourism at zero and with a future world even assuming there's some kind of post Covid world that we can get to eventually where companies and countries want to start on shoring their businesses much more because they've seen the problems with supply chains when they get hit by something unexpected like a pandemic. Given all of that and given what you all seem to be saying about the seeming irrationality of markets, what is the nasty financial outcome here that we seem to be careering towards? Does this mean that Brazil we're going to see a Brazilian debt default? That there's going to be a Brazilian debt crisis that is going to have a bunch of contagion for the rest of emerging markets? Is that the sort of medium term outcome here?
- [15:24]
D
I think that's unlikely because so much of Brazil's debt is in reai. That's one thing that a number of Latin American countries have done, not Argentina in terms of really kind of deepening their local debt markets. And that doesn't mean that that's the.
- [15:40]
A
Domestic currency they can issue in reais, which is the currency in Brazil and then they can repay that just by printing more of them.
- [15:47]
D
Yeah, I mean granted there are limitations to that in terms of the strength of their currency. But. And yes they obviously do have hard currency debt. They have contingent liabilities of kind of state owned and quasi state owned enterprises that have dollar debt. But I think it's unlikely in the near term that you'd probably have some massive Brazilian sovereign debt crisis. However, that doesn't mean that things couldn't get ugly.
- [16:14]
A
So what would ugly look like?
- [16:16]
D
I mean, I guess I would say it really depends on what happens in frankly the rest of the world and not just Brazil in terms of this is export oriented economy. Now people are probably going to eat regardless of what happens with the crisis. So they're still probably going to be able to export soybeans. However they have a number of other commodities as well that can be really hit. So if you're talking about the rest global trade declining the way we've seen recently numbers coming out and you really start to see this economy not able to pull itself out of recession. It only recently got out of its last recession. You know, then you may start to have the rest of the kind of financial community start to get a little bit more nervous about its debt sustainability, about its capacity to pay debt, and then that can start kind of a whole other crisis. Now, again, I don't think that's something that would happen in the near term. It could. I think it's unlikely, and that's why I think people will still lend them money. However, that doesn't mean down the line, it couldn't potentially happen.
- [17:21]
B
Just to add to Anna's point, but also to get to Felix's question, I agree that the Brazil situation is probably not going to blow up in the next six months. But to me, it's not just the fear of contagion, of a big economy like this having a big crisis and then affecting neighboring economies. The kind of fear that we have traditionally had. It's that all of these countries are suffering major shocks right now. So let's contrast Brazil to a location that I know very well, which is Kerala in India, which is one of the states in India, one of the few states in India that has done a good job in dealing with COVID I mean, a remarkably good job in dealing with it. Their economy is tanking completely. Doesn't matter that they're doing a good job because they're dependent on tourism, they're dependent on remittances. I mean, people there cannot travel to their jobs elsewhere. No tourists can come, and there's no end in sight. And so I would think that the conditions for the dominoes to fall, where we have 30, 40 countries around the world all unable to meet their obligations, we will be in that situation very quickly. And at that point, maybe Lee can illuminate the answers for us. At that point, I don't think that we have a plan in place for what we are going to do. I fear that the resources of the IMF are not going to be enough, and the Europeans are too busy dealing with their own problems. So hopefully I'm wrong and Lee will explain why. No, it's all going to be fine.
- [19:32]
A
So I want to. Just before we get to this sort of hypothetical future crisis, I want to try and get a bead on where we're at right now. It seems to me that. Me too, what you're talking about is Brazil could be really bad in the future, India could be really bad in the future. It's kind of bad right now, but like somehow they're managing to do whatever they need to do right now, partly because they have pretty effective Covid response. In terms of emerging market crises that we've been through in the past, and Lee has been through probably dozens of them at this point, where does the current crisis stand in terms of severity, not in terms of hypothetical. We could have a financial crisis in the future. Where are we right now? Does the fact that so many countries are still able to access the markets to borrow money, does that mean that this crisis so far is actually not quite as bad as the terrible worst crisis in living memory sort of crisis that we all thought we were going into back in March?
- [20:49]
C
I don't think we've ever seen anything quite like this. We have had sovereign debt crises in the last 40 years. Of course, we had a systemic one in the 1980s, but they were more or less regional. The Asian debt crisis in the late 1970s, Russia, Argentina, of course, this is a situation in which, if you believe the IMF's predictions, virtually the entire world economy is going to suffer a sharp downturn. And so if you look for places that can pick up the slack, if you have one country, take the classic situation that we faced many, many times, a sovereign debt crisis driven by oil prices. So oil prices go to $100 a barrel, that helps Ecuador, that hurts the oil importers. There's always been a balance. What do you do, however, when the entire world economy is not collapsing but is struggling, when remittances are drying up, when tax revenues, when the tax base for these countries is withering? We haven't seen anything quite like this before.
- [22:16]
D
I completely agree. I think that we're in, we could potentially be in this kind of like eye of the hurricane where things seem somewhat stabilized, but the fundamentals just keep getting worse. I mean, again, a lot of EM countries have been helped by like the dollar swap lines that were opened. You know, there have been a number of things that have certainly helped. However, that doesn't change the fact that coming into this crisis there was a tremendous amount of debt. There had been so much increased debt and in the kind of emerging and developing world. And then on top of this, it's complicated by the fact like this isn't the 80s when the debt is held by one bank, it's held by 8 million different parties. You have China significantly involved. This is very, very complicated. And the only reason that right now I think things haven't completely fallen apart is because you have the Fed, you have some other central banks that are kind of engaging in this incredible monetary stimulus. However, those economies are going to be struggling, those developing economies are going to be struggling, and we don't know how this plays out. We're all just kind of thinking, oh, it'll be kind of like the last time, or we don't know that. Also, my last thing here, EM was really helped in 2008 because China engaged in a tremendous amount of spending and you had this massive commodity boom. And so that's why they were able to do much better than one would probably have anticipated. However, that is incredibly unlikely to happen again. So we don't know where the growth, we don't know where the demand is coming from, essentially anywhere, but especially in a lot of these emerging economies.
- [23:47]
A
So to wrap up this segment, Lee, we have seen an astonishing reduction in global poverty over the past two or three decades, which has largely coincided with the rise of the capital markets in developing countries. Do you see that coming to an end? I think on some level, if a bunch of lenders to foreign governments in hedge funds lose some money because there's a default, you know, that's bad, but we can, you know, cry relatively few tears for the creditors who went into that with their eyes open. But in terms of the actual 6 billion people in the world who don't live in rich developed nations, does this crisis risk putting an end to the long secular story of poverty reduction and increase in wealth that we've been seeing? And could 2019 turn out in hindsight to be the high point?
- [25:00]
C
I think we will certainly see, Felix, a significant increase in the number of people living below the poverty line, at least for the near term. No one knows when this crisis abates. No one knows how quickly the world economy can recover afterwards. But for the near term, governments all around the world are faced with the dual challenges of needing to spend more money to ameliorate the effects of the crisis at the very same time that they're not getting earning or taxing anywhere near the amount of money that they were before. And that produces budget shortfalls. And it's a matter of months before budget shortfalls begin to eat into the social safety nets in many of these countries. I'm afraid we are going to see retrograde movement in that campaign of poverty reduction, which, as you rightly say, has had a number of successes in the last 20 years.
- [26:13]
A
So we have Libukait Nguytu Guladian, last time you came on this show, we talked a lot about Venezuela, and as far as I can make out, basically nothing has happened. Between then and now, it's amazing how long countries can be in a state of crisis without anything getting resolved.
- [26:37]
D
Referred to as muddling through.
- [26:40]
A
Muddling through. Even a complete basket case like Venezuela can somehow mud the point at which Donald Trump told my colleague Jonathan Swan that maybe he'll start talking to Maduro again because, you know, this Guaido guy, he's not a winner, he's not winning anything. So Venezuela's gone nowhere. There's not much of an update there. But the big thing that has happened since you were last on is that we had another Argentine debt default. So me too. Can you bring us up to speed on Argentina?
- [27:14]
B
Well, Argentina, from a law professor's point of view, has not failed to disappoint. I am always astounded at how much material Argentina by itself provides for my law teaching purposes because in terms of astoundingly stupid moves regarding how to restructure their debt, they fill up all of the teaching materials and I fear that they are filling up another chapter in ways I would not have even begun to predict. But that is ongoing right now. And Lee and Anna have been following it, I think quite carefully. But yes, Argentina is not failing to disappoint, even though I think that their finance minister from when I've encountered him at conferences, he's a guy who really understands the sovereign debt market and spent a lot of time studying their prior debacles. Yet he seems to have landed himself and the Argentine country into another morass that they didn't need to be in.
- [28:39]
A
So what would you say is the single dumbest thing that he's done this time around?
- [28:44]
D
Well, should I take that or Mitu, do you want to take that?
- [28:46]
B
Oh, since we're talking about dumbest things, you should start first and I'll add to that.
- [28:52]
D
So let me take a step back for some of our listeners who maybe haven't been following Argentina quite as closely to just say, right now, Argentina, there's about $65 billion of foreign currency debt. They're working on restructuring. They came out with a proposal that essentially all the creditors said was a nonstarter. There has now been this kind of back and forth negotiation. There are multiple different creditor groups, lots of different creditors involved, different interests, and recently it seemed like maybe we were going to get somewhat close to a deal and then that seems to somewhat have fallen apart. Having said all of that, I think the dumbest thing that Argentina is doing right now is this strategy referred to as redesignation and the Pac man strategy, which is basically a way to try to push through a restructuring when they don't actually have enough acceptance among their creditors. And this involves these things I know we've talked about before called collective action clauses, which have kind of evolved over time. Me too. And Lee are both very familiar with these. They can talk a lot more about them. But what Argentina is trying to do right now is essentially use this new enhanced collective action clause in a way that I think it pretty clearly wasn't designed for. And it's causing a tremendous amount of animosity among, I think, the creditors and frankly, a lot of people. And it, you know, it could, by Argentina doing this, not only could they put themselves in a bad position, but I think they could actually make it harder for other sovereign issuers down the line to potentially use these clauses.
- [30:28]
A
So I was a big fan of PAC man back in the day. Me too. Tell me why PAC man is something I should not be a fan of right now.
- [30:37]
B
Okay, so first disclosure, I did not grow up playing video games, so I don't actually know that much about PAC Man. But 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. So here's my understanding in very simplistic terms, Argentina does not have enough creditor support for its deal. It's close, but it doesn't have enough creditor support. So it's come up with this strategy where it says, look, let all the bonds vote for my offer. And if a bunch of bonds don't like my offer, I'm just going to not count them in the vote. I'm only going to count the bonds that do vote in adequate percentages for my offer. So that's step one, that's sort of sleazy enough. But then in step two, once I've gotten a bunch of people to vote for but another bunch of people haven't, I'm going to take all of those who voted and then revote in those by offering them, say, half a cent more. And because people will vote for me for half a cent more, I'll get more votes and then I can squeeze more of the dissenting creditors in the other bonds. Now, this is a painful strategy. B, it's not clear it's actually ever going to work, and C, is really hard to understand. And it actually took us weeks to sort of figure out what the hell they were talking about and why it would work. So for all those three reasons, I think this is a strategy that is neither elegant nor, nor has Any meaningful effect other than to really get the creditors irate.
- [32:50]
D
Yeah, and I totally agree. And I think that what is very likely to happen is a. I honestly don't think they can do this. Like, I, in the sense of. I think they may. They could potentially could pull some smaller series along, but I don't think it works in terms of what they really are aiming for. And then on top of that, they're just. All the creditors just going to litigate. They're just, you know, they're going to be like, f this and they're going to go right back to the courts, which is exactly what these collective colleges were kind of designed to avoid. And frankly, exactly what Argentina should want to avoid after not that long after their last decades long litigation.
- [33:24]
B
And this also has an effect on the topic that we were talking about earlier, which is countries putting in place contractual provisions that would help us get through the crisis. One of the things that the Argentine shenanigans have done is that they have gotten creditors around the world very wary about these kinds of clauses that are supposed to help restructurings. And they are talking about, and I think fairly seriously, although you guys know this more fairly seriously about going back in time and putting in place clauses that do not allow restructurings to occur easily. If that happens, we're really screwed in the near future.
- [34:15]
D
Yeah, it's amazing. It's like you're looking at the restructuring now and kind of where the parties lie. So you have this biggest creditor group, this kind of ad hoc group and exchange group that have come forward with this proposal, and you have Argentina. And if you look at what they should be arguing about, you can be like, okay, they're arguing about, like the, you know, interest profile, they're arguing about accrual, they're arguing about a value recovery instrument. Like, those things make sense. Okay. But now the main thing they seem to be arguing about are these clauses and potentially issuing new bonds. But as Mitchie was saying, going back to this old indenture and using these kind of clauses that offer fewer protections in a way for. For the borrowers. And it really doesn't make any sense if you kind of think about it, because it's like it's only there because I think Argentina took this strategy, angered the creditors. Now the creditors are saying, well, we're not issuing new bonds with these old clauses. And then Argentina is like, well, we're not going backwards. And that's where we are.
- [35:11]
A
So I'd like to bring Lee in here and zoom back a little bit and and not ask about Pac man clauses and debt restructuring, but just talk about Argentina writ large, you know, is no stranger to debt defaults and this kind of crisis. And to go back to what I was saying about just the population and the wealth of the country, you know, 100 years ago, say maybe, maybe 115 years ago, Argentina was the fifth richest country in the world. And it has been on a long sort of steady decline for the past century. I guess my question for you, Lee, is to what degree is that decline a function of its mismanagement of sovereign finances? And specifically, does the country do better when it isn't fighting with the capital holders in the rest of the world? And does the country do worse from the perspective of its citizens when it does enter into this kind of fight?
- [36:21]
C
I'm not sure the decline of Argentine fortunes over the last century can be laid wholly or maybe even principally at the feet of mismanaged sovereign debt workouts. I think much of it is politics. It is inherently a very rich country. We had an example of an administration, that of Mauricio Macri in 2016, who attempted to return to a more orthodox approach, settled with most of the holdout creditors from the prior default, which went all the way back to December of 2001. But I think there has been fiscal mismanagement in the country, chronic fiscal mismanagement that has produced the challenges that successive administrations in that country have had to deal with. I don't think the primary cause of their difficulties is their approach to sovereign debt restructuring.
- [37:31]
D
Yeah, I really agree with you there because I mean, I think if you kind of look at Argentine history, you had in the 19th century these kind of agricultural oligopolies basically. So it was incredibly unequal, but there was a tremendous amount of wealth. But then the country was very dependent on export prices. So then there was this idea of like, okay, we no longer want to be dependent on exports, so we're going to engage in this import substitution led industrialization policies which you saw throughout Latin America. But in Argentina you have the Peronists come in and similar to a number of other kind of politicians in other Latin American countries. But the Peronist designed this system that of kind of misallocation of resources and subsidies and overspending and all of these things that was essentially designed almost to create deficits, debt and like, it's a system that can't function. But the problem is it's incredibly difficult to unwind. And so I think that this is kind of a bit of what you've seen in Argentina is they've always kind of, you know, they'll go halfway in one direction, but they always kind of end up going back because it's politically so difficult to unwind. And the problem is, until you fix those kind of underlying problems, they can get all the debt relief in the world. And I'm not saying they shouldn't get debt relief, but it doesn't matter how much debt relief you give them, as long as you continue doing that, it's never going to change.
- [38:52]
C
There are two problems that they face. Old sins cast long shadows. One is that any rightly constructed Argentine that gets his or her hands on a dollar bill knows from history that they better get it to Miami as quickly as possible. And one of the reactions, of course, to the crisis, the default in end of 2001, 2002, was the Coralitos, the blocking of bank deposits, the mandatory pacification of bank deposits. So you had a dollar deposit in a bank one day. You went to bed that night thinking that you owned a US Dollar. You woke up the next morning and you owned a peso. And the peso then immediately plummeted in value. And that was devastating. So from the standpoint of the citizens, their collective memory is that capital flight is the only way to safety. Then on the creditor side, you have a collective memory of not just serial debt restructurings. There have been a number of countries that have had to go through that, but unusually contentious sovereign debt restructurings. And so the creditor community is prepared, I think, to cut the, the country less slack than perhaps it should. And the combination of those two things is pretty deadly. The IMF poured $44 billion into the last 18 months or so of the Macri administration. How much of that simply washed through the country and went back out again? And until your own citizens have the confidence that they will invest in your economy and bring foreign currency back, it is difficult to crawl out of these situations.
- [41:01]
D
Yeah. And I think it's interesting because it also kind of goes back to, in a way, what we were saying with Brazil. Brazil has been able to kind of develop more of this, like, local debt market. And, you know, it's like, well, why don't you have that in Argentina? Well, it's partly just what you said. You know, your population is not going to be holding wealth in this country. And also they're going to be wary about, you know, buying securities that the Peronist can tomorrow say, okay, guess what, we're not paying you, or completely changing all these things. So that then makes them more dependent on Foreign creditors, and it just continues this cycle. And Argentina is also a country that although they do certainly have exports, they don't have the type of export base that supports the level of borrowing and foreign currency that they historically have had.
- [41:43]
C
Let me say one thing in their favor now I am more of an optimist that they will reach a deal with their creditors. This time around, the bid and ask tier has narrowed very substantially. The problem, having lived through this experience in many countries, the problem often is that the financial advisors become mesmerized by their own spreadsheets. And so they will plug in assumptions of all kinds. Commodity prices, tax revenues, interest rates, et cetera. They'll plug in assumptions and then the spreadsheet will tell you we have an unsustainable debt problem in the year 2047 and we must deal with it. Well, that is not just fanciful, it is not just speculative. It is occult divination to know what the country can support in terms of debt service in the year 2047. But they become mesmerized with it. Both sides do. And it can produce a degree of ossification in the negotiation process. If everyone sitting at the table were telling the truth, they would say beyond about three years, we have no idea what the world's going to look like. But that's not how it's done, unfortunately.
- [43:09]
D
In this particular instance. It's interesting too because you have both sides talking about these kind of like red lines. You know, we can't go beyond this. But the red lines will not, will be based on all of the assumptions you're talking about. They're also based on exit yields on like where that bond is going to things that like these are all totally fanciful, like they aren't real numbers, but people get so tied to them. And then it stops people from on both sides, because both sides totally do this. It stops both sides from being probably as rational as they should be.
- [43:34]
C
Yeah. And the government, the current government quite correctly asked for very significant short term debt relief. In effect, they wanted a debt service holiday for a turn. The bondholders did not reject that out of hand. They said they wanted minimal coupon payments, but in effect they understood and accepted the government's argument that it needed a period, two to three, four years of very significant near term debt relief in order to recover the country's economic footing. So they're not, to my mind, philosophically that far apart in how they're approaching the problem. And I'm more of an optimist. I think they will strike a deal There'll be some more drama.
- [44:25]
D
Hey, it's Anna. We recorded this episode in June and since that time the Argentina debt drama has continued. So I wanted to offer a small update. So since then, both sides have released a number of proposals and while they haven't yet gotten to a deal, it looks like they're getting very close.
- [44:53]
A
Okay, I think we should have a numbers round. Me too. Did you bring a number?
- [44:58]
B
I did. And it won't surprise you that my number is Brazilian. It is 2.875%, which is the coupon on the Brazilian five year bond where it issued $1.25 billion in early June. I think that is astonishing. Who is lending to them with a coupon of 2.875%, thinking they'll get paid back in five years.
- [45:28]
A
How about you, Anna? What's your number?
- [45:30]
D
So My number is 9.63 times 10 to the 26%.
- [45:40]
C
All right, I was just about to say that.
- [45:43]
A
Anna, the numbers get bigger. We've now we've. We've left the trillions and the quadrillions in the dust and now we're in. Now we just have to start talking about exponents because there's no way of. Okay, what's this one?
- [45:59]
D
So this is the. The record for the largest annualized inflation rate. So my other panelists here, where was this?
- [46:09]
A
Is this Feimar? Germany?
- [46:11]
D
No, no.
- [46:12]
A
Zimbabwe?
- [46:13]
D
Nope. Hungary. So Hungary in 1946 holds the record and that is in fact the record with the pengo.
- [46:21]
A
The Hungarian pengo.
- [46:23]
D
Yep.
- [46:24]
A
All right, I am now going to go on the search if anyone has some Hungarian pengos lying around from the 1940s, do email us on slatemoneylate.com because I feel like I need some Hungarian pengos in my scriptophilic collection. My number is 4.9%, which is the new IMF forecast for global growth in 2020. Oh, wait, hang on a sec. No, it's minus 4.9%. They are projecting that the global economy is going to shrink by 4.9% this year, which is enormous and completely unprecedented. There's literally no time that the world has come close to that kind of shrinkage. I'm old enough to remember in January 2009, once the global financial crisis was in full swing, a bunch of greybeards in Davos telling me that it's actually impossible for the global economy to contract. That's just basically not how economics works. Of course it did, but not that much. This one is off the charts in terms of a contracting global economy. What we don't have, as Anna said earlier, is China coming to the rescue at all? So that is bad news for everyone and especially the United States, which is going to shrink even faster than 4.9%. Lee, what's your number?
- [48:03]
C
Felix? My number is one. 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. And I hope it won't be much more than 20.
- [48:31]
A
But. So what's the number right now? Just so that we have like a baseline here.
- [48:35]
C
Okay. There are right now a handful of countries that are in the debt restructuring process. Lebanon, Argentina, of course, Ecuador, Venezuela, whenever Mr. Maduro leaves Angola. But we have 41 countries and 41 of the poorest countries because they're the only ones eligible for the G20 Debt Service Suspension Initiative. 41 of those countries there are 73 eligible for, 41 of them have applied to the Paris Club for a suspension of bilateral debt payments. That gives you some idea among the poorer countries just how widespread the liquidity shortage is as a result of the pandemic. I think as we move further into this year and into next year, you're going to see middle income countries, as the World bank categorizes them, that is not the poorest countries are also going to be faced with the need for debt relief of one kind or another. And unless the recovery is faster than I think the IMF is predicting it will be, and many people are predicting it will be, I'm expecting as we get into 20, 21, a number of countries are simply going to have to restructure their debt.
- [50:07]
A
So I want to nail you down on this prediction because I love predictions. These 20 countries that you're talking about, it's not just going to be those 41 countries which are asking for Paris Club debt relief now under Paris Club rules, asking for what's known as comparable treatment from the private sector, you're saying 20 middling countries that are not included in net 41. Am I right?
- [50:31]
C
No, I'm not necessarily saying that. Not all of the 41 are going to need a full scale debt restructuring. Some of them will, Felix, but not.
- [50:41]
A
All of them will.
- [50:43]
C
So there will be some group of the poorest countries that will be in this situation, but then there will be middle income countries.
- [50:51]
A
Give me a number for middle income countries.
- [50:54]
C
I'm not sure I can do that. I could probably fill most of the 20 with just Caribbean countries. Unless the tourist industry returns, cruise ships and airlines and so forth, being prepared to fly people. The wild card is, of course, will we have a vaccine quicker than we think? And will all of this dissipate like a fog on a spring hillside? But I'm not betting on that.
- [51:25]
A
Few of us are. Lee Bukai, thank you very much for coming on. As you say, you're an expert on Caribbean debt restructuring. I am once again super happy that the man, the legend who single handedly restructured the debt of Dominica more than once, I believe, has been here. Me too. Gulati, thank you for coming on. It's been great to have you. Many thanks for to everyone for tuning in and especially to Jessamine Molly for producing Keep the Emails Coming. Our email is slatemoneylate.com and we will talk to you next week on Slate Money.