The Bad Pac-Man

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S1: Membership.

S2: Hello, welcome to the Bad Man edition of Slate Money Guide to the Business and Finance News of the Entire Planet.

S3: I’m Felix Salmon of Axios. We have an absolute stinker of an episode for you this week because first, not the first time we have the dynamic emerging market expert duo of Liebreich and ME2 Ghoulardi, not to mention Anna SHYMANSKY. This is 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 slick money, which is how is this crisis affecting the majority of the world, not just America, but basically that six billion people who live in developing countries and who are often living 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 Pacman. And you’re just going to have to listen to the third segment in order to understand why Pacman is relevant. Me too. To introduce yourself. Who are you?

S4: 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, definitely unlike my co-author Lee Bukit. I do not talk to world leaders about how to solve their problems on Caribbean beaches.

S3: Lee, you’re coming to us from a Caribbean beach. What what are you up to these days?

S5: 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 me. We have 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 me to Gulati is noble war.

S3: So all that is coming up. We will solve the international financial systems problems or failing that, at least diagnose them on this episode of Slate Money. So let me start with this idea of a sudden stop leak. Can you tell me what a sudden stop is this a sudden stop?

S6: 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 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.

S3: 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 the access back.

S6: 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. So a little hard to know exactly why the markets should have been should have responded so more inefficiently to a situation that is fraught with uncertainty.

S7: Yeah, I mean, I think this kind of question is for both. You know, Lee or me, too. You know, 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? You know, 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?

S8: 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 rate that they did. But their costs in terms of their health care, given the absolutely terrible job they’ve done dealing with Coalbed, 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. And 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.

S3: So what would the right direction be? Would you think like if if things were going in the right direction, what would that look like?

S9: 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 Cauvin 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’m I am very worried about the direction we’re going in. And then 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 Kovik 19 situation and that it’s getting worse.

S4: I could put in place contractual clauses that say, look, if the costs from covered 19 get even worse, a certain number of people die or our hospitals are overwhelmed. I’m 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.

S3: So there’s no I mean, I want to get Lee in here because he’s he’s the expert on putting clauses into sovereign debt contracts. No one’s put more clauses into this fucking that contract fluently. Practically speaking, is that within the realm of possibility? Is it conceivable that a country could go could go along to its lawyers and its bankers in New York and say, hi, I want Kovik get out of jail free clause in my bonds? Would that ever happen?

S6: 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.

S3: And realistically, it would be a lot more. It wouldn’t be 10 basis points. It would probably be like significant numbers of percentage points. If they get access, that’s all.

S6: If it if it is focused on kov it, 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 is 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 hurricane 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 until 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 by the pandemic.

S7: 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. I think you’re the one lending. You’re the one borrowing. It’s often this, you know, you think of, okay, what are things gonna 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 when everything falls apart, then you know that that becomes a different issue. But I, I can’t say I’m really surprised at this. I mean, I’m probably surprised at the speed at which. You know, 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.

S6: 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. That is instruments that would automatically trigger a degree of debt relief or 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 crumple zone in front of your automobile, that his you 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. We’ll pay for it in basis points. And the minister knows that he or she is unlikely to be the beneficiary here. If ever the time comes when it has to be activated. So we did as a kind of insurance policy. But you’ve got to pay the premium and and that’s the very human inhibition.

S3: 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, crumple zone attached to it careering into quite possibly the worst covered crisis in the world with a complete mavroyiannis, a president with exports falling off a cliff with his ME2 says tourism zero. And with a future world, even assuming there’s some kind of post covered 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 is 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?

S7: I think that’s unlikely because so much of Brazil’s debt is in re. I know that that’s one thing that a number of Latin American countries have done, not Argentina has in terms of, you know, really kind of deepening their local debt markets. And that does it for them.

S3: That’s the 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.

S7: Yeah. I mean, granted, there are limitations to to that in terms of the strength of their currency. But, you know, and yes, they do have 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, you know, massive Brazilian sovereign debt crisis. However, that doesn’t mean that things could get ugly. So what would ugly look like? 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, you know, this is a export oriented economy. Now, people are probably going to eat regardless of what happens with the crisis. So there’s 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 if you’re talking about, you know, the rest. Global trade declining the way we’ve seen recently, numbers coming out. You know, when 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. I could I think it’s unlikely. And that’s why I think people will still lend the money. However, that doesn’t mean down the line it couldn’t potentially happen.

S9: Just to add to Anna’s point, but to 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 it’s 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. 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 Cauvin. 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 there. 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 the conditions for the dominos 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 that that point maybe Leigh, 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 labels say a leave will explain why. No, it’s all going to be fine.

S3: So 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 the ME2, 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 a pretty effective Kovik response in terms of emerging market crises that we’ve been through in the past. And Lee has been through, you know, probably dozens of them at this point. Where does the current crisis stand in terms of severity? Not in terms of like a 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, you know, worst crisis in the history in living memory sort of crisis that we we all thought we were going into? Back in March?

S10: 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 middle. 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, but take take the classic situation that we faced many, many times, a sovereign debt crisis driven by oil prices. So oil prices go to one hundred dollars 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 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.

S7: I completely agree. I think that we’re in. We could potentially be in this kind of like eye of the hurricane where it where things seem somewhat stabilized, but the fundamentals just keep getting worse. I mean, again, a lot of the, um, 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’d been so much increased debt in the kind of emerging and developing world. And then on top of this, you know, it’s complicated by the fact like this isn’t the 80s when the debt is held by like one bank know, it’s held by eight million different parties. You know, you have China significantly involved. You know, this is very, very complicated. And the only reason that right now, I think, you know, things haven’t completely fallen apart is because you have the Fed, you have some other central banks that are, you know, kind of engaging in this, you know. Credible monetary stimulus. However, those economies are gonna 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, to be kind of like the last time or. We don’t know that also. My last thing here, EUM 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. 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.

S3: 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. You know, six 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, an increase in wealth that we’ve been seeing and. Could like 20, 19 turn out in hindsight to be the high point?

S10: 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.

S3: So we have lubricating to Gladia. And last time you came on this show, we 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, referred to as muddling through, muddling through. Even even a complete basket case like Venezuela can somehow muddle through to the point at which Donald Trump told my colleague Jonathan Swann that maybe he’ll start talking to Maduro again because, you know, this Guido guy is not a winner. He’s not winning anything. So Venezuela’s got nowhere. We won’t 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 derful. So me too. Can you bring us up to speed on Argentina?

S9: Well, Argentina. From a law professors point of view, has 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 Leon. Ana, I have been following it. I think quite carefully. But yes, Argentina is not failing to disappoint, even though I think their finance minister from when I’ve encountered him at conferences, I mean, he’s a guy who really understands the sovereign debt market and spent a lot of time studying there prior debacles. Yet he seems to have landed himself and the Argentine country into another morass that they didn’t need to need to be in.

S3: So what would you say is the single dumbest thing that he’s done this time around?

S7: Well, should I take that admitted? You won’t take that.

S9: Oh, when we’re since we’re talking about dumbest things you should start for. OK, then I’ll add to that.

S7: So let me take a step back for some of our listeners who maybe haven’t been following Argentina quite as closely to just stay right now. Argentina. They’re sick about sixty five billion dollars of foreign currency debt. They’re working on restructuring. They came out with a proposal that essentially all the creditors said was a non-starter. 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 re designation 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 we’re both very familiar with these. They can 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, 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 insurers down the line to potentially use these clauses.

S3: So I was a big fan of Pacman back in the day. Me too. Tell me why PAC Man is something I should not be a fan of right now.

S9: Okay, so the first disclosure, I did not grow up playing video games, so I don’t know that much about Pacman, but this particular Pacman is very bad in part because it doesn’t work very well and has the other effect of pissing everybody off. So so here’s my understanding in very simplistic terms. Argentina does not have enough creditors support for its deal. It’s close, but it doesn’t have enough creditors support. So it’s come up with this strategy where it says, look, let all the bonds vote for my offer.

S11: 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 that’s that sort of sleazy enough. But then step two once had gotten a bunch of people to vote for, but a bunch of 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 into other bonds.

S9: 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 has any meaningful effect other than to really get the creditors irate.

S7: 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 gonna be like this and they’re going to go right back to the courts, which is exactly what these collective clauses were kind of designed to avoid. And frankly, exactly what Argentina should want to avoid after not that long after the last, you know, decades long litigation.

S11: Then there’s also 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.

S7: Yeah, it’s amazing. It’s like you’re looking at the restructuring now in kind of where the parties lies. 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, OK, they’re arguing about, like, you know, interest profile. They’re arguing about a cruel. They’re arguing about a value recovery instrument. Like those things make sense. OK. But now the main thing they seem to be arguing about are these clauses and potentially issuing new bonds. But as Mitchell was saying, going back to this old Dench indenture and using these kind of clauses that offer fewer protections in a way for it for the borrowers. And it really doesn’t make any sense to kind of think about it because it 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 what we are.

S3: So I’d like to bring Lee in here and zoom back a little bit and not ask about man Glos isn’t debt restructurings, 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, one hundred years ago, say, maybe, maybe a hundred and fifty 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 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?

S10: And from the perspective of its citizens, when it does enter into this kind of fight, 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 Mauricio Mocker 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 have been fish, there has been fiscal mismanagement in the country, chronic fiscal mismanagement that has produced the challenges that successive administrations in that country have have had to deal with. It isn’t. I don’t think the primary cause of their difficulties is their approach to sovereign debt restructuring.

S7: Yeah, I really agree with you there. And I think if you kind of look at Argentine history you had in the 19th century, these kind of agricultural oligopolies basically, you know, 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, OK, we no longer want to be dependent on export. So we’re gonna engage in this, you know, import substitution. But industrialization policies, which you saw throughout Latin America. But in in Argentina, you have the Peronists come in and similar to a number of other kind of politicians in other in other Latin American countries like the Peronist designed the system, that of kind of mis allocation of resources and subsidies and overspending at 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, you know? And so I think that this is kind of a bit of what you’ve seen in Argentina. They’ve always kind of you know, they’ll go halfway in one direction, but they always kind of end up going back as 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 does matter how much debt relief you give them, as long as you continue doing that. It’s never going to change.

S10: 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 2000, end of 2001, 2002 was the coral Leto’s, the blocking of bank deposits, the mandatory pacification of bank deposits. So you had a A dollar deposit in a bank one day. You went to bed that night thinking that you owned a U.S. dollar. You woke up the next morning and you owned the 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’ve 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 country less slack than perhaps it should. And those the combination of those two things is is pretty deadly. The IMF poured forty four billion dollars into the last 18 months or so of the Mochrie administration. How much of that simply wash 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.

S7: Yeah, I think it’s interesting cause they also kind of goes back to in a way, we were saying with Brazil, you know, Brazil has been able to kind of develop more of this like local debt market. Well, why don’t you have that in Argentina? What’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 parents can tomorrow say, OK. What you know, we’re not paying your 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.

S10: 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 here has narrowed very substantially. The problem, however, having lived through this experience in many countries, the problem often is that the financial advisers become mesmerized by their own spreadsheets. And so they will plug in assumptions of all kinds commodity prices, tax revenues, interest rates, etc. They plug in assumptions and then the spreadsheet will tell you we have an unsustainable debt problem in the year. Twenty, forty seven. And we must deal with it. Well, that is not just fairness for all. It is not just speculative. It is a cult divination to know what the country can’t support in terms of debt service in the year twenty forty seven. 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.

S7: Unfortunately, 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, unlike where that bomb is going to. Things 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. Yep.

S10: 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 term that the bondholders did not reject that out of hand. They said they wanted minimal coupon payments, but in effect, they 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 and how they’re approaching the problem. And I’m more of an optimist. I think they will strike a deal. Well, there’ll be some more drama.

S7: 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.

S3: OK. I think we should have a numbers round. Me, too. Did you bring a number?

S4: I did. And it won’t surprise you that my number is Brazillian. It is two point eight seven five percent, which is the coupon on the Brazilian five year bond where it issued one point to five billion dollars in early June. I think that is astonishing. Who is lending to them with a coupon of two point eight seven five percent thinking they will get paid back in five years?

S3: How about you? What’s your number?

S7: So my number is nine point six, three times tend to the 26 percent. All right. We always suggest everyone is just about to say that I know that the numbers get bigger.

S3: We’ve now we’ve we’ve left trillions, the quadrillions in the dust and now we’re in. And now we just have to start talking about exponents because there’s no way. OK, what’s this one?

S7: So this is the the record for the largest annualized inflation rate. So my other panelists here. Where was this? Was this by my Germany? No. No Zimbabwe. No Hungary. No, Hungary. Hungary in 1946 holds the record. And that is, in fact, the record with the Pengo.

S3: The Hungarian pengo. Yep. All right. I am now going to go on the search. If anyone has some Hungarian pinkos lying around from the 1940s, do email us Slate money and Slate dot com because I feel like I need some Hungarian pinkos in my Skripal Felic collection. My number is four point nine percent, which is the new IMF forecast for global growth in 2020. Oh, wait, hang on a sec. No, it’s minus four point nine percent. They are projecting that the global economy is going to shrink by four point nine percent 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, two thousand nine, once the global financial crisis was in full swing. A bunch of greybeards in Davos telling me that there was 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 it’s 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 four point nine percent. Leigh, what’s your number?

S10: He likes 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 a rearrangement of their external debt. And I hope it won’t be much more than 20.

S3: But so what’s the number right now? Just so we have like a baseline here.

S10: OK. 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 40, one of the poorest countries because they’re the only ones eligible for the G20 debt service suspension initiative. Forty one of those countries, there are 73 eligible. Forty one 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.

S12: And unless the recovery.

S10: 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 2021, a number of countries are simply going to have to restructure their debt.

S3: 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 on the Paris Club rules asking for what’s known as comparable treatment from that private sector, you’re saying 20 middling countries that are not included in that 41. All right.

S10: 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, Feliks, but not all of them will. So there will be some group of the poorest countries that will be in this situation. But then they will be middle income countries. Give me a number for middle income countries. Sure, I can do that. I could probably feel most of the 20 with just Caribbean countries on less and less, the tourist industry returned 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 far gone of Springhill side? But I’m not not betting on that.

S3: Few of us leave. OK. 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 singlehandedly restructured the debt of Dominika more than once, I believe, has been here.

S2: Me too, Gulati. Thank you for coming on. It’s been great to have you. Many thanks to everyone for tuning in and especially to Jessamy Molly for producing. Keep the e-mails coming. E-mail is money and it’s the dot com. And we will talk to you next week on sleep. Money.

S3: So back when things were really bad. Back in, I believe it was Monge, Lee, you came up with a bright idea for countries to not have to make debt payments while the crisis is raging. Did that gain any traction? And do you still think it’s necessary?

S12: It did not gain much traction, although the official sector looked at it pretty carefully. In the end, the official sector persuaded itself that if they, quote, called upon, close quote, the private sector creditors to provide debt relief similar to what the G20 had asked bilateral creditors to provide.

S10: And remember, this is all for the poorest countries that if they called upon the private sector, the private sector would rally round the flag and would assist in the process very quickly.

S12: They learned that the private sector saw many, many, many obstacles and complexities in doing so. And they have the official sector has been waiting for the private sector to sort out those difficulties and be able to implement actual debt relief. Remember, we are now halfway through this year and all of the debt suspension was supposed to be taking effect back on May the 1st. So we are well into the year. And as far as I can see, the private sector continues to see many roadblocks and hurdles. Moreover, and maybe this is a major factor, the credit rating agencies have frightened many of these countries that if they ask for debt relief, even a temporary deferment of coupons from their private sector creditors, that that will trigger a rating downgrade. And the countries that have had market access are very leery of surrendering it by asking for private sector debt relief, even though they may desperately need debt relief.

S10: It’s a it’s a cruel, cruel choice to say to these countries that you must either tarnish your credit reputation by asking for a deferment of debt service for the balance of this year, or you must face the prospect that you will not have the resources to deal with the crisis and the decision will be measured in the lives of your citizens. That is a cruel, immoral choice to force upon these countries.

S7: Yet it also seems like if you force countries to not be able to deal with the crisis and deal with the economic side of it, they’re gonna have less capacity to service their debt down the line.

S6: We’ve tried to make that point that that allowing the country to divert its resources to deal with this problem effectively is actually, in the longer term, best interest of the country. The other aspect of this is political. To the extent that the official sector is providing assistance, either in the form of bilateral debt deferments or disbursements of new funds, as the IMF is doing on a rapid financing basis and the private sector continues to collect its debt service payments regularly. There is no doubt that the private sector is free riding on the generosity of the official sector, and that does not sit well with a number of the creditor countries.

S7: So, yeah, one of the things that I thought was really cool was how you designed this so that the creditors could the private creditors could actually have some comfort in the fact that the money that was gonna be deferred was going to be had this kind of super senior status. So could you maybe just like explain a little bit?

S10: Yeah, sure. The idea was that the interest payments due to private sector creditors would be redirected into a central credit facility that would be managed by a multilateral development bank. Could be the World Bank, could be Asian Development Bank. African Development Bank. We had suggested that the Multilateral Development Bank put some of its own money, doesn’t have to be a lot, but some of its own money into the central credit facility in a manner such that the borrower could not default on the money owed to commercial creditors without simultaneously defaulting. On the amount owed to the Multilateral Development Bank, the effect of that would be to share the so-called preferred creditor status, to share the preferred creditor status halo that surrounds multilateral financial institutions. And it is de facto recognized. Also, I think the circumstances of the money that would be in this central credit facility, it already represents a deferment, a restructuring of claims against the debtor country, taken in the context of dealing with a humanitarian crisis. It will never be a large segment of the country’s debt stock and therefore de facto, it should be recognized as senior, even if the country in 2021 or thereafter must face a broader scale debt restructuring. This would be regarded as senior, the equivalent of what in the corporate bankruptcy world is called debtor in possession financing.