Speaker 1: Hello, and welcome to another episode of the Odd Thoughts podcast.
Speaker 1: I'm Tracy Alloway, my co host Joe Wis, and Vault
Speaker 1: is away this week. I believe he is sampling the
Speaker 1: electric scooter scene over in Los Angeles. But this actually
Speaker 1: gives me an opportunity to dig into a slightly geek
Speaker 1: year subject, and that would be sovereign debt restructuring. This
Speaker 1: is when governments opt to exchange their loans or bonds
Speaker 1: for new loans or bonds, you know, typically less expensive ones,
Speaker 1: or when they decide to pay back their debt at
Speaker 1: a slower pace or a cheaper pace or whatever. All
Speaker 1: of this hashed out amongst lawyers, typically acting on behalf
Speaker 1: of the borrower the country that borrow the money, and
Speaker 1: the lenders the investors that lent it. And yes, I
Speaker 1: can sense your excitement from here, but before you turn
Speaker 1: this podcast off, we are actually going to be marrying
Speaker 1: one of the biggest stories in finance and markets right
Speaker 1: now with the theme of sovereign debt restructurings. And that
Speaker 1: story is one MDB, the one MDB scandal that is
Speaker 1: currently rocking Asia and has certainly extended beyond the region
Speaker 1: all the way over to Goldman Sachs in New York.
Speaker 1: And the interesting thing about one m dB is that
Speaker 1: it involves government guaranteed debt in addition to super yachts
Speaker 1: and Leonardo DiCaprio, and it can actually be I think
Speaker 1: a jumping off point to discuss the fundamental heart of
Speaker 1: sovereign debt, which is a government guarantee or a promise
Speaker 1: that the borrower the state is going to repay the
Speaker 1: money that it's borrowed. So here with us to discuss this,
Speaker 1: and I'm very excited about it, is Matto Galati. He's
Speaker 1: a professor of law at Duke University and he also
Speaker 1: blogs over at Credit Slips, which I urge you all
Speaker 1: to read. So Mitto, thank you so much for coming on.
Speaker 1: Thank you Tracy. It's a delight to be talking to
Speaker 1: you after such a long time. It has been a
Speaker 1: long time. So I'm going to outsource some of my
Speaker 1: hosting abilities since Joe is away, and I'm going to
Speaker 1: ask you to set the scene for us. What is
Speaker 1: the one MDB scandal and how does it feed into
Speaker 1: your particular area of expertise. So the one MDB scandal,
Speaker 1: and I'm going to draw here heavily from articles in
Speaker 1: Bloomberg and the Wall Street Journal and the Financial Times.
Speaker 1: I did not come to the one MDB scandal right
Speaker 1: at the start. I came to it like many others
Speaker 1: did because of writing in the press and this wonderful
Speaker 1: book um that two Wall Street Journal reporters did. But
Speaker 1: one bit about the one mdb uh scandal caught my attention,
Speaker 1: and that was that this finance vehicle, essentially a sovereign
Speaker 1: wealth fund for Malaysia that didn't do the normal stuff
Speaker 1: that sovereign wealth fun did, which was to invest the
Speaker 1: money of the country. Instead, it was borrowing money, sort
Speaker 1: of the opposite of what you would normally do with
Speaker 1: a sovereign wealth fund. It was a sovereign wealth fund
Speaker 1: that had no wealth of the sovereign. It was accumulating
Speaker 1: wealth by borrowing from outside investors and then siphoning it
Speaker 1: off to these corrupt um financiers who were running it.
Speaker 1: And what interested me about that was not only were
Speaker 1: they corrupt, but they had managed in a couple of
Speaker 1: the bonds to get the State of Malaysia to actually
Speaker 1: guarantee the payments to the outside investors, and so it
Speaker 1: sort of merged this corruption angle with sovereign financing because
Speaker 1: it was basically corruption in the raising of the money
Speaker 1: and then sticky the bill to the taxpayers. Now we've
Speaker 1: got even more interesting sort of at the end of
Speaker 1: the story, after the scandal is revealed, and then the
Speaker 1: Malaysian government falls, which is fairly stunning in corruption scandals
Speaker 1: in South Asia. Usually for those of us who live
Speaker 1: in South Asia were used to this kind of corruption scandal,
Speaker 1: but this was just bigger than even what we're used to.
Speaker 1: And the government falls and the new government comes in,
Speaker 1: and there were a couple of these one MDB financings
Speaker 1: that did not have a state guarantee, and the new
Speaker 1: government comes in and one of the first things that
Speaker 1: the Finance minister does is to slap a new guarantee
Speaker 1: on these corrupt debts, which to me was completely bizarre.
Speaker 1: So years ago, my friend Liebu Kite and I worked
Speaker 1: on corrupt loans in Iraq and in our research, one
Speaker 1: of the things that we discovered was, you know, the
Speaker 1: one way for countries to get out of debt obligations
Speaker 1: in a restructuring or just in a court proceeding is
Speaker 1: to have evidence of corruption. If there's evidence of corruption
Speaker 1: by sort especially by the agents of the bank. Then
Speaker 1: you can go to court and say this is not
Speaker 1: really our loan, stick this to the bank that was
Speaker 1: corrupt and engineered the loan. Malaysia had this evidence in spades.
Speaker 1: I mean, the reporters had done a fantastic job of
Speaker 1: uncovering all this evidence. So Malaysia could have said we're
Speaker 1: not going to pay this. Instead that they did the opposite,
Speaker 1: which is to embrace the loan and say, even though
Speaker 1: it was corrupt, we're gonna stick our taxpayers with it.
Speaker 1: And these are poor taxpayers a poor country, and it
Speaker 1: dramatically increases their debt stock and you know, so there
Speaker 1: are all sorts of bad things that happen, and that's
Speaker 1: what got my interest, and I started writing about this
Speaker 1: particular aspect of this, and I'm continuing to do research
Speaker 1: on this, and I'm happy to talk about that. But
Speaker 1: that's sort of the back story on this, right So
Speaker 1: I definitely want to ask you about your research. But
Speaker 1: just in summary, the oddity here in your opinion is
Speaker 1: that we we basically had successive Malaysian governments who have
Speaker 1: slapped guarantees or confirmed guarantees on one MTB bonds even
Speaker 1: after uncovering that alleged bad behavior on the part of
Speaker 1: the previous regime, and of course, despite that discovery, they
Speaker 1: decided to honor the debt and full at least so far.
Speaker 1: And they've gone so far as to say this sort
Speaker 1: of explicitly, why would they do that? What has your
Speaker 1: sort of early research suggests on that front. So there
Speaker 1: are two explanations in the literature. So there's in a sense,
Speaker 1: this is not a completely new phenomenon. So if you
Speaker 1: go back to I mean, the most vivid example for
Speaker 1: me is South Africa and the transition from the part
Speaker 1: that government to the a n C government. So that's
Speaker 1: one case in which you know, a lot of the
Speaker 1: debts that the apartheid government incurred was to buy arms
Speaker 1: to put down you know, armed insurrection and basically the
Speaker 1: pro democracy movement. So one would have thought, and the
Speaker 1: many NGOs thought, look, those debts are as ugly and
Speaker 1: corrupt and evil as any debts possibly could and the
Speaker 1: new government can repudiate it. The new government of South
Speaker 1: Africa post apart that did not reputed it. Then they
Speaker 1: paid those debts in full. And their rationale was, look,
Speaker 1: our foreign advisors who help us raise money on the
Speaker 1: capital markets have said it will show that we are good. Um,
Speaker 1: we are good borrowers that will pay all our debts
Speaker 1: regardless of you know, what they were used for. We're
Speaker 1: just so good And you know there is some economic
Speaker 1: logic to it, I guess, but we just didn't know
Speaker 1: the ants or to the question of whether it helps
Speaker 1: you or not if you pay stupid debts or corrupt debts. Right,
Speaker 1: you're basically dealing in in theoreticals. Right, if you go
Speaker 1: down one course of action, which is honoring the debt,
Speaker 1: you're never going to know what would happen if you
Speaker 1: repudiated the debt. Yeah, so it's one one course of
Speaker 1: action is sort of that you think it'll it'll improve
Speaker 1: your credit rating or lower your borrowing costs. The other
Speaker 1: courses you can reduce your your debt stock and so
Speaker 1: there there are these two stories. But the story for
Speaker 1: paying it is it'll it'll improve your reputation as a borrower,
Speaker 1: And we just don't know the answer. But that's the
Speaker 1: theoretical conjecture that it will improve your reputation as a borrower.
Speaker 1: So how does this play into one MDB and what
Speaker 1: you've found so far? So the one MDB case is
Speaker 1: very useful because usually the way the situation arises is
Speaker 1: that you have a corrupt debt that the country could repudiate,
Speaker 1: but it doesn't repudiate, it just goes on paying it.
Speaker 1: So it's when I say corrupted, is one that a
Speaker 1: court would recognize as corrupt and would say, okay, you
Speaker 1: don't have to pay it. In one MDB they had
Speaker 1: at least a few of these one MDB H debts
Speaker 1: that did not have a state guarantee, and then they
Speaker 1: slapped the state guarantee on them afterwards. So it allows
Speaker 1: us to empirically test at the point at which they
Speaker 1: put on this guarantee whether or not the market for
Speaker 1: other Malaysian bonds actually improved. So do the borrowing costs
Speaker 1: of Malaysia go down after it does this? And we
Speaker 1: can measure quite precisely whether the benefit from slapping the
Speaker 1: guarantee was actually greater than the cost of the guarantee.
Speaker 1: And basically the data show so far. This is work
Speaker 1: that I'm doing with Ugo Panitza at the Graduate Institute
Speaker 1: in Geneva, and we can't find any evidence of even
Speaker 1: the slightest benefit to Malaysia. Their yields didn't go on
Speaker 1: at all. Like basically, it's just a huge loss for
Speaker 1: the Malaysian people and the new government. So if there's
Speaker 1: some if there's no empirical evidence, no hard evidence of
Speaker 1: a benefit to Malaysia from honoring the debt, is there
Speaker 1: may be a technical reason that they might have been
Speaker 1: thinking about. For instance, are they worried that if they
Speaker 1: don't honor one MDB bonds they're going to cause like
Speaker 1: a cross default or something on their other debt. Good
Speaker 1: question That one MDB bonds did not have cross default
Speaker 1: provisions with the other bonds, and that leads to the
Speaker 1: possibility of another explanation, which, unfortunately, from my twenty years
Speaker 1: of working on sovereign debt restructuring, is the one I
Speaker 1: think is the more plausible explanation, which is that there
Speaker 1: are people in the current government, even though it's a
Speaker 1: new government who who were either involved or who know
Speaker 1: there are people who were involved in the corruption that
Speaker 1: took place earlier, and they don't want a trial where
Speaker 1: that corruption would get uncovered. And I think that in
Speaker 1: almost all of these cases, even though you have a
Speaker 1: new government, the new government does not want to uncover
Speaker 1: the Really the ugly secrets of what happened, and they
Speaker 1: don't want a discovery process of the bad behavior. Yeah,
Speaker 1: because some investor is going to sue regardless, saying you
Speaker 1: have to bay me, because they're always innocent investors who
Speaker 1: bought this on the secondary market. And then then you
Speaker 1: will have at least some court process or some journalists
Speaker 1: will then go uncover this stuff because it's so juicy,
Speaker 1: and then you know, more politicians will fall. I mean,
Speaker 1: this is you know, if we talk about this later,
Speaker 1: then the news story that is in the headlines, the
Speaker 1: Mozambique story is just it said, almost at the one
Speaker 1: MDB level of corruption and hiding and successor governments who
Speaker 1: are and more corrupt or you know, in in collusion
Speaker 1: with prior governments and everybody's just sticking the bill to
Speaker 1: the population of a poor country. Oh yes, I definitely
Speaker 1: want to ask you about Mozambique in a few minutes.
Speaker 1: I can't resist an opportunity to talk about tuna bonds.
Speaker 1: But before we do, just generally, how how difficult is
Speaker 1: it for a country to establish that debt issued by
Speaker 1: a previous regime was actually corrupt? What would they need
Speaker 1: to prove? Ordinarily it is very difficult to do that. So,
Speaker 1: you know, academics for almost a hundred years have been
Speaker 1: wrestling with this question of whether or not new governments
Speaker 1: should have to pay the debts of prior corrupt governments.
Speaker 1: It's called the doctrine of odious debts. But but the
Speaker 1: problem is international law has never recognized such a doctrine
Speaker 1: of odious debts. Periodically people have tried to get it
Speaker 1: to recognize, but the law international law of state, what
Speaker 1: is called state succession, is quite strict. You have to
Speaker 1: pay the debts of a prior government regardless. But there are,
Speaker 1: of course, since this is law, there are exceptions. And
Speaker 1: the exception is if in the making of the loan
Speaker 1: the prior debt, there was corruption by the agents, particularly
Speaker 1: the agents of the lenders, then the court just says, well,
Speaker 1: then that's not a debt of the country. We're just
Speaker 1: going to shift that debt to either the corrupt government
Speaker 1: leader or the banks. The banks who did it, they
Speaker 1: were corrupt, so it's their debt. But importantly for us,
Speaker 1: it is not shifted to the people. But this is
Speaker 1: very difficult to engineer and it is almost never done.
Speaker 1: Governments just don't want to do it one MDB actually
Speaker 1: gave us a case where could have been done because
Speaker 1: you know, no thanks to the Malaysian government, but thanks
Speaker 1: to the reporters who spent years, and maybe thanks to
Speaker 1: Leonardo DiCaprio because that's what you know, and Beyonce and
Speaker 1: whoever else was involved who made the story really interesting.
Speaker 1: I need to stand up for Beyonce. I don't think
Speaker 1: I'm sorry. My knowledge of pop culture is really really bad,
Speaker 1: but I remember there were some big music Swiss beats. Okay,
Speaker 1: if that that's a person who makes music, but yes,
Speaker 1: but I I Leonardo certainly got the whole world interested.
Speaker 1: And this new character Joe Lo who you know, was
Speaker 1: running around on his yacht and the Thai waters coverting
Speaker 1: with Thai generals. But we know a lot, and so
Speaker 1: this could have been the one case where we did it,
Speaker 1: and instead the Malaysian government just stuck the bill to
Speaker 1: its people. Although now I think, you know, after the
Speaker 1: US prosecutors have gone after the Joel's assets, the Malaysian
Speaker 1: government is saying, you know, Goldman Sachs should pay the bill.
Speaker 1: But I'm skeptical that they're really going to be able
Speaker 1: to stick them with the whole bill. Yeah, they are
Speaker 1: going after golden sacks, and it will be interesting to
Speaker 1: see that one play out in the US judiciary system
Speaker 1: and actually judiciary systems around the world. Now, But Mitto,
Speaker 1: you touched on this um a few minutes ago. Governments
Speaker 1: that did choose to repudiate debt under this you know,
Speaker 1: odious debt doctrine up. How many of those have we seen?
Speaker 1: Can you name some specific examples? Well, yes, there are
Speaker 1: some very famous examples that, in fact the repudiations are
Speaker 1: still in existence. So the Revolutionary government in Russia post
Speaker 1: the Czar I think, I mean, my history is fuzzy,
Speaker 1: nineteen seventeen. Uh, they still haven't. Those bonds are still standing.
Speaker 1: So if you go to London to an antique store,
Speaker 1: you can probably buy for a couple of pounds old
Speaker 1: Russian bond that in theory is still a valid obligation
Speaker 1: of the Russian government, and the successor Russian governments, including Mr. Putin,
Speaker 1: have refused to pay that on the grounds that it
Speaker 1: is an odious debt of the Czarist government. The same
Speaker 1: for the Imperial government in China. Those debts still have
Speaker 1: not been paid their outstanding debts, but successor governments have
Speaker 1: refused to pay them. Now, the question though, is whether
Speaker 1: a court in the US, in particular, since US basically
Speaker 1: is US and the UK are the world's governments in
Speaker 1: terms of which court systems government these laws would recognize
Speaker 1: such a debt. And no court has recognized, I mean,
Speaker 1: recognize such a defense. No court has recognized the defense.
Speaker 1: And these are two very very powerful countries that creditors
Speaker 1: can't easily seize their assets. Although there are some classic
Speaker 1: cases where creditors have, for example, tried to seize uh,
Speaker 1: you know, Russian paintings that are on tour around the world,
Speaker 1: or you know, airlines flying the president and things like that,
Speaker 1: but none have really succeeded. And so those are the
Speaker 1: two most famous examples of successor government saying the predecessor
Speaker 1: government was just so evil and the purposes of the loans,
Speaker 1: you know, for example, the Chinese railroad loans that were
Speaker 1: you know, largely engineered so that the Western powers could
Speaker 1: you know, divide up China into different spheres of influence,
Speaker 1: were you know, illegitimate, and we were throwing out the
Speaker 1: Western devils. So we're not going to pay them. Let's
Speaker 1: talk about some modern examples then, Um, some ongoing cases
Speaker 1: of bad bonds, and you know bad in many senses
Speaker 1: of the words. So you mentioned one already, which is
Speaker 1: tuna bonds in Mozambique. There's another big one, which I
Speaker 1: think would have to be Venezuela. Which one do you
Speaker 1: want to start with? Oh, I don't know. Those are
Speaker 1: the hunger bonds from Venezuela and the tuna bands from
Speaker 1: Mozambique are two of the most vivid cases that we've
Speaker 1: seen in years, and so I I hate to delight
Speaker 1: in them because they're really sad from the perspective of
Speaker 1: the people of those two countries. But why why don't
Speaker 1: we start with the tuna bonds since it's it's in
Speaker 1: the news literally this week and last week, and it's
Speaker 1: so vivid. It may be the it may even be
Speaker 1: worse than a one the one MDB scandal, because I
Speaker 1: think even in the one MDB scandal there were a
Speaker 1: few dollars in the pot. What happened here, I think
Speaker 1: it was about three years ago, was that the Mosa
Speaker 1: Mozambiques economy had begun to do a little bit better.
Speaker 1: You know, it's a very poor country, so much so
Speaker 1: that Mozambique had never been able to issue a euro
Speaker 1: bond and tap the international financial markets. But as the
Speaker 1: first step to tapping the markets, they decided, along with
Speaker 1: the help of Credit Suite and v TB, a Russian
Speaker 1: bank that is very important in almost all of the
Speaker 1: modern stories of corruption, they decided, we'll do alon. We'll
Speaker 1: do a loan to help us buy both enaval boats
Speaker 1: and tuna boats. Since tuna is a big part of
Speaker 1: our industry. We're going to take a loan and we're
Speaker 1: gonna buy tuna boats to help our economy. And the
Speaker 1: sort of they do this these three big loans, and
Speaker 1: they back the loans with state guarantees, and almost immediately,
Speaker 1: literally before the first couple of interest payments have to
Speaker 1: be made, they run out of money. And they run
Speaker 1: out of money in part because none of the boats
Speaker 1: ever get used, and almost no money. I mean, I
Speaker 1: think they can't find even a single dollar of the
Speaker 1: proceeds of these loans that went to the Mozambique government. Right, So,
Speaker 1: from what I remember, the allegations and these are still
Speaker 1: being investigated, but the allegations are that Mozambique government officials
Speaker 1: basically we're siphoning off millions of dollars that were meant
Speaker 1: to be going into the Mozambique economy, like the tuna industry,
Speaker 1: through these financings. I taught a class on sovereign debt
Speaker 1: restructuring in Portugal to a small group of sort of
Speaker 1: young government officials who were going to be working on
Speaker 1: these deals. And this was before or right around the
Speaker 1: time I think the first um scoop came out in
Speaker 1: the Western financial press about these tuna bonds, not ever
Speaker 1: having caught a single tuna. These government officials, they didn't
Speaker 1: know about the articles in the western press, but they
Speaker 1: were officials from the Mozambique government, young people, and they said, look,
Speaker 1: you know, we can look out our windows and we
Speaker 1: just see these boats sitting there and they never go
Speaker 1: out into the water, and where's all that money gone.
Speaker 1: And then what happens is every single one of these
Speaker 1: defaults and no money goes into Mozambique. Mozambique goes quickly
Speaker 1: from having fairly good fiscal position for such a poor
Speaker 1: country to be becoming one of the most indebted countries
Speaker 1: in the world. We thought having gotten a single dollar
Speaker 1: of benefit. Now the original loans were eventually again from
Speaker 1: what I remember, they were swapped into euro bonds, right
Speaker 1: because they still had that government guarantee which was valuable
Speaker 1: to investors. And in fact, I think this was Mozambique's
Speaker 1: first euro bond, and I remember it was being pitched
Speaker 1: at the time. There were a lot of people saying
Speaker 1: it was an excellent way to get yield via frontier
Speaker 1: market exposure to Mozambique. A loan that have could have
Speaker 1: been easily repudiated the prior ones where the original lenders
Speaker 1: were still in place, and you know, it could probably
Speaker 1: could have identified them, or at least the state could
Speaker 1: have said, at least our guarantee that we put on it,
Speaker 1: we're taking that off and you can chase out the
Speaker 1: tuna company if you want. But we as we both know,
Speaker 1: there's nothing in the tuna company for any creditor to
Speaker 1: go after. But once they converted it into a nice
Speaker 1: tradeable Mozambique euro bond, then the country was on the
Speaker 1: hook for it. And then there would be new lenders
Speaker 1: who are buying traded instruments and it would be near
Speaker 1: impossible to repudiate that. So, you know, one of these
Speaker 1: things with both with the one MDB scandal and with
Speaker 1: the Tuna bonds scandal is that you see how even
Speaker 1: things that legally you could repudiate can be converted if
Speaker 1: the government in place is not strong enough to want
Speaker 1: to repudiate it, they can be converted into much prettier
Speaker 1: and safer instruments that are protected from legal attack. And
Speaker 1: that's what we've seen. I mean, that's the really sad
Speaker 1: part of these stories. Now, even in the Tuna bonds,
Speaker 1: you know, US prosecutors are going after the bad guys,
Speaker 1: but that never works because getting bad guys assets is
Speaker 1: just very difficult. They don't have that many assets. They
Speaker 1: tend to spend it all. And you know, it also
Speaker 1: tends to be the fact that in many of these
Speaker 1: corrupt situations, it's not just one bad guy. There are
Speaker 1: hundreds of people who have been taking and we never
Speaker 1: catch them all, and so the people invariably get stuck
Speaker 1: with the bill. Well, let's talk about another instance of
Speaker 1: well bad behavior, I guess in the debt market. Venezuela
Speaker 1: and the Hunger bonds has to be a major major
Speaker 1: example of this. And you know, we were talking about
Speaker 1: why governments would choose to honor or not honor their
Speaker 1: debt earlier, and one of the weird and unusual and
Speaker 1: very sad things about Venezuela's that even as ordinary Venezuelans
Speaker 1: were starving, the Maduro regime, you know, continue to repay
Speaker 1: its debt for a very very long time, you know,
Speaker 1: longer than a lot of people had expected. So why
Speaker 1: would they choose to do that? And what's the future
Speaker 1: of the bonds issued under the Maduro regime? Okay, so
Speaker 1: the hunger pond is another astounding I mean two two
Speaker 1: nineteen must be the years of corrupt sovereign debt issuances.
Speaker 1: But um, the Maduro government. You know that Venezuela has
Speaker 1: the largest oil reserves in the world, so it's incredibly rich.
Speaker 1: And one of the effects of being so resource riches
Speaker 1: even though they have this basically cleptocratic government in place,
Speaker 1: foreign investors are willing to invest in their bonds in
Speaker 1: incredibly large amounts because they expect that some future governments
Speaker 1: sometime will come in and revive the economy and then
Speaker 1: be able to pay them all. So Venezuela, unlike Mozambique
Speaker 1: or even Malaysia, has sort of the resource curse of
Speaker 1: investors are willing to keep plowing money in uh no
Speaker 1: matter what. And on the flip side of it, the government,
Speaker 1: because it is dependent on the money from the investors,
Speaker 1: on new money from the investors, is willing to keep
Speaker 1: paying the coupons on the old loans as long as
Speaker 1: it can, just so as to continue to keep its
Speaker 1: connection to the financing markets. So that's sort of the
Speaker 1: cycle that they get into in Venezuela. And it is
Speaker 1: why um the economist at Harvard, Ricardo Houseman, started calling
Speaker 1: these hunger bonds, because people in Venezuela were, you know, malnourished,
Speaker 1: not getting medication, while at the same time the government
Speaker 1: is paying out millions of dollars because Venezuela has such
Speaker 1: a large debt stock in coop on payments to foreign investors.
Speaker 1: So Venezuela for a number of years had been the
Speaker 1: best performing emerging markets sovereign it by a wide margin.
Speaker 1: I think. So Venezuelan people are starving, and yet you know,
Speaker 1: if you buy Venezuelan bonds, you're having a giant party.
Speaker 1: So this one bond, but but this all, you know,
Speaker 1: this all eventually comes crashing down because the government is
Speaker 1: just so incompetent that it can't even run its own
Speaker 1: oil industry properly. And they stop being able to make
Speaker 1: even their coupon payments. But then the government comes up
Speaker 1: with a new strategy, and their new strategy is, look,
Speaker 1: you know, we can't raise new bonds on the international market.
Speaker 1: You know, nobody will underwrite our bonds. So what we'll
Speaker 1: do is we've got some old bonds that we weren't
Speaker 1: able to sell to anybody, and we had you know,
Speaker 1: parked them in local financial institutions, but never raised any
Speaker 1: money for those. What we'll do is we will find
Speaker 1: some investors out there. And now, because we're basically bankrupt,
Speaker 1: we can't promise investors high interest rates because if you're
Speaker 1: going to go bankrupt, nobody wants a high interest rate
Speaker 1: because once you go into bankruptcy or basically an insolvency proceeding,
Speaker 1: you don't get to pay. You don't get paid that
Speaker 1: high interest rate. The game then is what you have
Speaker 1: to promise me is that I will get priority over
Speaker 1: the other lenders, the prior lenders. Now in sovereign debt,
Speaker 1: if you get really into the weeds, there's no priority
Speaker 1: promise because there's no bankruptcy system. But the way to
Speaker 1: use financial engineering to get priority is to give somebody
Speaker 1: a dramatically inflated claim. So it's as if you know, you, Tracy,
Speaker 1: are willing to lend me, you know, a hundred million dollars,
Speaker 1: but you don't want to hire interest rate. And I'm
Speaker 1: very risky. So the way I do that is I say, look, Tracy,
Speaker 1: give me the hundred million dollars. I'll give you a
Speaker 1: piece of paper that says on it a billion dollars.
Speaker 1: So when when I eventually go bankrupt and when I
Speaker 1: have taken my ill gotten gains and gone to Switzerland,
Speaker 1: and you come to the new government and turn in
Speaker 1: your claim for the restructuring, they will think you are
Speaker 1: owed a billion dollars. And essentially with the Hunger bonds,
Speaker 1: that's what happens. They give this one bond issue. I
Speaker 1: did think it was a two point two billion dollar issue,
Speaker 1: and I can't remember two point two billion, but I
Speaker 1: think the actual amount that Venezuela gets is close to
Speaker 1: eight hundred million dollars. And so the Venezuelan government, you
Speaker 1: can look at their capital reserves and on the roughly
Speaker 1: around the day of the bond is you know, this
Speaker 1: parked bond is is is sold, their capital reserves go out,
Speaker 1: go up by exactly this amount with a little discount
Speaker 1: for whoever got the side payment um. And this hits,
Speaker 1: This hits the press through social media, and it spreads
Speaker 1: like wildfire under the name of the Hunger bond, and
Speaker 1: Marco Rubio tweets it out, and Ricardo Housman tweets it out,
Speaker 1: and everybody's outraged, and the market starts penalizing this bond
Speaker 1: very very heavily. So in some ways this is a
Speaker 1: story both of the kinds of things that bad governments
Speaker 1: do in order to preserve their power, but for once,
Speaker 1: this is also a story of how social media can,
Speaker 1: you know, if if people understand what sort of bad
Speaker 1: stuff is going on, end up sort of stopping the
Speaker 1: bad deals. And you know, in the in the this case,
Speaker 1: the happy part of it is Wall Street took such
Speaker 1: a beating for having done this deal that basically every
Speaker 1: major investment bank, including institutions like Credit Suites that were
Speaker 1: involved in the Tuna bond, promise not to touch this
Speaker 1: bond and not not not to do these kinds of deals. Again, Well,
Speaker 1: I want to press you on this point because I
Speaker 1: think this is going to be the thing that sort
Speaker 1: of links all these different stories that we've been talking
Speaker 1: about together, you know, whether it's one MDB or Tuna
Speaker 1: bonds and Mozambique or Hunger bonds in Venezuela. But what
Speaker 1: do you think is the most effective way of dealing
Speaker 1: with sovereign debts bad sovereign debts incurred by corrupt leaders
Speaker 1: or you know, through unsavory actions or questionable governments. How
Speaker 1: how can people actually deal with those I liked talking
Speaker 1: about the stories because I had stuff to say about that.
Speaker 1: Now you are pointing to you are asking the question
Speaker 1: that I don't actually don't have a good answer for.
Speaker 1: We have been working on this for years, as long
Speaker 1: as I have been in this business, and how to
Speaker 1: devise a system to improve the sort of the quality
Speaker 1: of sovereign debt borrowing and in particular to reduce the
Speaker 1: amount of corrupt borrowing, and we have largely failed. I
Speaker 1: think the best suggestion out there, and especially drawing from
Speaker 1: the Hunger bond experience, unfortunately, is not one that I
Speaker 1: came up with, but it is one that Ricardo Housman
Speaker 1: and Ugo Panizza, these two economists have been talking about,
Speaker 1: and which is to do early in the process of
Speaker 1: bond issuances a kind of an odious nous rating for
Speaker 1: the bond, where you would really use the ability of
Speaker 1: the financial markets to rate bonds in terms of how
Speaker 1: corrupt the particular bond issuances or the process of bond issuance,
Speaker 1: for example, whether or not they got proper legislative approval,
Speaker 1: um was audited properly, because all of these situations that
Speaker 1: we're talking about, if in hindsight we go back and
Speaker 1: look at them, they were all filled with very clear
Speaker 1: markers that this was not done properly. It's just in
Speaker 1: all of these cases we've only discovered them well after
Speaker 1: the fact. But if we had some kind of public
Speaker 1: rating systems that are public rating system that investors could
Speaker 1: actually look at, then maybe we would have a market
Speaker 1: mechanism to do what the court systems and the existing
Speaker 1: international you know, financial standard system has not been able
Speaker 1: to do. But you know, it's just a conjecture. I
Speaker 1: I mean, in my work, the stuff that I have
Speaker 1: tried to work on in terms of you know, uh,
Speaker 1: sort of putting in place legal mechanisms in the courts
Speaker 1: has utterly failed. So I have to turn here to
Speaker 1: the work of other people, which of course pains me
Speaker 1: because I would like to turn to my own work.
Speaker 1: All right, well, um, I think we're going to have
Speaker 1: to leave it there, Minto. It's been so lovely to
Speaker 1: talk to you again. And honestly I could talk to
Speaker 1: you about sovereign debt for um, you know, many more
Speaker 1: minutes and certainly hours, but it's all the time. We
Speaker 1: have a Mitto Colate, professor of law at Duke University.
Speaker 1: Thank you so much, Thank you so much, Tracy. It
Speaker 1: was a real treat to tact to you. This has
Speaker 1: been another episode of the Odd Thoughts podcast. You can
Speaker 1: follow me on Twitter at Tracy Alloway. You can follow
Speaker 1: my absentee co host Joe Wisenthal at The Stalwart. You
Speaker 1: can also follow our producer Top Foreheads at Foreheads T
Speaker 1: and you can follow our Bloomberg head of podcast, Francesco
Speaker 1: Leavy at Francesca Today. Thanks for listening.