Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe Wisnthal. Joe. We like
Speaker 1: to talk about debt, don't we? We do? Remember we did? Uh?
Speaker 1: Last fall? We had our Odd Lodge live performance I
Speaker 1: Guess or Live episode, and we had a whole section
Speaker 1: all about the nature of debt, sovereign debt, sovereign debt, restructuring,
Speaker 1: things like that. Definitely one of our one of our
Speaker 1: go to topics. Yes, And one of the reasons why
Speaker 1: I find debt quite fascinating and you sort of touched
Speaker 1: on it just there, is because there's almost like a
Speaker 1: moral veneer on debt, Like the issue of who owes
Speaker 1: what and to whom is almost a moral one. I've
Speaker 1: totally noticed this, and I totally agree. I mean, there
Speaker 1: was a story that I tweeted out from Bloomberg a
Speaker 1: couple of weeks ago about how, um, you know stub Hub.
Speaker 1: It's where you can buy tickets for like concerts kinds
Speaker 1: of stuff, and they had this thing on there they're
Speaker 1: like partnering with some companies so that if tickets were
Speaker 1: too expensive for you, you could borrow money to buy
Speaker 1: them and people just have such a visceral reaction. They're like, Oh,
Speaker 1: this is terrible, this is outrageous, and like, I guess
Speaker 1: kind of, but it's so interesting. Like nothing makes people
Speaker 1: more upset in the financial sphere than the perception that
Speaker 1: someone is taking out debt in an unsustainable or way
Speaker 1: or for a reason that doesn't make total sense, like
Speaker 1: maybe like buying a house or something. They just get
Speaker 1: People have such strong views on debt totally. It's a
Speaker 1: hot button topic, and this is one of the reasons
Speaker 1: why debt restructurings are so fascinating, because it's just one
Speaker 1: giant argument over how to work out the debt and
Speaker 1: whether the country that assumed all that debt deserves to
Speaker 1: get away with it, as a lot of people think.
Speaker 1: But there is one particular notion of debt that is
Speaker 1: even more interesting from a moral perspective than all others.
Speaker 1: Do you know what it is? Uh, tell me what
Speaker 1: it is? Odious debt? Ah, So this is, well, what
Speaker 1: defined odious debt? Because I've seen this for a long time,
Speaker 1: but I'm not sure if I actually know the proper definition. Okay, well,
Speaker 1: it's something that has been mentioned on our podcast. I
Speaker 1: think a couple of times before now, but we've never
Speaker 1: really gone into it in detail. But the first thing
Speaker 1: to know about odious debt is it's a concept that
Speaker 1: really only exists in the minds of lawyers and academics.
Speaker 1: It doesn't really exist in the real world. But what
Speaker 1: it is as a concept is the notion that if
Speaker 1: a government issued a bunch of debt, and the government
Speaker 1: did that without the consent of the people, and did
Speaker 1: it without actually benefiting the people, then the new government
Speaker 1: shouldn't necessarily be responsible for that debt. And you can
Speaker 1: imagine that the scenario where that would most likely apply
Speaker 1: is something like where you have a dictator or a
Speaker 1: despot that takes a bunch of debt and uses it
Speaker 1: to terrorize his or her population, and then eventually, you know,
Speaker 1: they get overthrown there's a new government. Should the people
Speaker 1: that suffered under the previous regime have to pay back
Speaker 1: the debt that the dictator actually borrowed? Right, It's a
Speaker 1: great question, and of course incredibly complicated and automatically you
Speaker 1: could imagine that the question of whether debt or is
Speaker 1: debt is odious or not would be very subjective and
Speaker 1: open to interpretation. But fundamentally, paying off a past debt
Speaker 1: involves an imposition on real resources of a country. That's
Speaker 1: less money that can go to domestic needs, social services,
Speaker 1: rebuilding after a war, things like that. So while on
Speaker 1: the one hand, you might say a nation's debt is
Speaker 1: a nation's debt, uh, the question about what is very
Speaker 1: what is realistic to impose on the new population, on
Speaker 1: the new government in terms of damages and obligation to pay.
Speaker 1: There's a major moral dimension, absolutely, And I mentioned at
Speaker 1: the beginning of that definition that odious debt is really
Speaker 1: just an idea. It doesn't exist in the real world.
Speaker 1: But what we're going to talk about today is the
Speaker 1: closest we ever got to odious debt actually being enacted
Speaker 1: as some sort of legal precedent. The world did get
Speaker 1: very close to it, and we're going to find out
Speaker 1: exactly how close and why it didn't really materialize as
Speaker 1: a concept, and we're going to do it through what
Speaker 1: was really one of the most interesting debt restructurings of
Speaker 1: all time. Great, I can't wait for this one, all right,
Speaker 1: So I'm really happy to say our guest for this
Speaker 1: episode is a previous Odd Thloughts guest Simon Henrickson, a
Speaker 1: PhD student at the London School of Economics, has written
Speaker 1: a fantastic paper about Iraq's debt restructuring and he's going
Speaker 1: to walk us through it. Simon. It's great to have
Speaker 1: you on. Thanks for having me so Simon. Uh, First
Speaker 1: of all, it's a it is really a fantastic paper
Speaker 1: and it's available on the lc website so everyone can
Speaker 1: go and read it hopefully after the podcast. But it's
Speaker 1: really fascinating because it's almost like people don't remember this
Speaker 1: chapter of Iraq's history, I guess because it gets superseded
Speaker 1: so much by multiple wars and you know a lot
Speaker 1: of terrible things happening within its borders. But at one point,
Speaker 1: Iraq was the most indebted country in the world. Correct
Speaker 1: at the eve of the US invasion in twos and three,
Speaker 1: Iraq was so indebted that it had more than five
Speaker 1: times this GDP in national debt. Now, this story is
Speaker 1: very long and has a bunch of different interesting topics,
Speaker 1: everything from as you mentioned, odious debts where it was
Speaker 1: fairly close to being enshrined in the doctrine of international law.
Speaker 1: It had some powerful backers, but it also has all
Speaker 1: the all the things that make for a fascinating financial story.
Speaker 1: So one is that you didn't really know who actually
Speaker 1: was owed a lot of the debt. Some of the
Speaker 1: debt was political, some of the debt was owed through
Speaker 1: variety of shady or illegal holdings. It included various national
Speaker 1: intelligence agencies, and goes all the way back to the
Speaker 1: early nineteen eighties. So this sort of a plethora of
Speaker 1: things coming together in what I would argue is probably
Speaker 1: one of the few successful things that happened in Iraq
Speaker 1: in the post invasion reconstruction, which is why it sort
Speaker 1: of often gets overlooked because so many other disastrous and
Speaker 1: terrible things happened, whereas this sort of flew under the radar.
Speaker 1: So before we obviously get to any talk of how
Speaker 1: it was restructured, let's talk about how the debt was incurred.
Speaker 1: As you point out in your paper in seventy nine,
Speaker 1: it's still that point due to the country's tremendous oil
Speaker 1: reserves and so forth, it was actually a net creditor
Speaker 1: to the rest of the world, so it didn't have
Speaker 1: any uh net sovereign debt. And then, as you point
Speaker 1: out later, the debt by on the eve of the
Speaker 1: invasion was several multiples of its GDP. How did the
Speaker 1: debt start to get built up and who are the
Speaker 1: original lenders to it? Why? And why did why did
Speaker 1: they need this debt? Yeah, so if we go back
Speaker 1: to the nineties seventies, is this really where at least
Speaker 1: some of the current political discussions and wars originate. So
Speaker 1: it was a time in which each eonomic growth was
Speaker 1: actually fairly robust. Iraq came out of the nineteen seventies
Speaker 1: with double digit growth trade. After the nationalization of the
Speaker 1: Iraqi Petroleum Company, you had oil which said new highs
Speaker 1: in terms of price. And Iraq came out in nineteventy
Speaker 1: nine and was a net creditor to the world, So
Speaker 1: there are foreign exchange research was somewhere around thirty five billion,
Speaker 1: which is almost two thirds of his g d P.
Speaker 1: And it's in that context at Santassa, Hussein takes over
Speaker 1: and starts his his multi decade reign, so it actually
Speaker 1: starts from a position of being a net creditor to
Speaker 1: the world. Obviously, in the geopolitical sphere, this is also
Speaker 1: a time when the rest of the Middle East undergoes
Speaker 1: tremendous change. The seventy nine Iran Revolution, which ends up
Speaker 1: with the with the Tehran hostage crisis of the U
Speaker 1: s embathy means that Iran is not favorable favorably seen
Speaker 1: by the rest of the world, and Saddam starts this
Speaker 1: conflict in a in a sense in which he has
Speaker 1: backing from almost all of the geopolitical world, anything from
Speaker 1: the Soviets to the US to Europe. And it's really
Speaker 1: in the context of the eight year war between Iran
Speaker 1: and Iraq that the entire debt is raised or funded.
Speaker 1: All of the debt is political water and comes from
Speaker 1: a couple of different sources which can all sort of
Speaker 1: be described as political backing for Iraq's war. So you have,
Speaker 1: if we try to break it down into into three buckets,
Speaker 1: you have the rest of the Middle East, the GCC country,
Speaker 1: the Gulf countries who provide backing to Iraq because they
Speaker 1: favor Iraq. They don't want Iran to become the Middle
Speaker 1: East and hegemon. And some of these loans or grants
Speaker 1: are given to simply just have Iraq by weapons import
Speaker 1: for the for the war. Now, the grants or loans
Speaker 1: and the reason I'm not just calling them loans is
Speaker 1: that Iraq consider these things grants at the time. They
Speaker 1: don't think they're loans. They just thinks they are to
Speaker 1: help them back, whereas the rest of the countries, especially
Speaker 1: Saudi and Kuwait, consider them loans and there is going
Speaker 1: to be a debate about that later. The other one
Speaker 1: is simply backing from other governments what we today would
Speaker 1: call O E C D and ends up being restructured
Speaker 1: in the Paris Club, which is the U S or Europe.
Speaker 1: They both send direct money. They also sent personnel and
Speaker 1: weapons to help Iraq fight the war. And then there
Speaker 1: is the murky unknown loans that are sort of shrouded
Speaker 1: in mystery, which we don't really know what comes from.
Speaker 1: So the best example is a loan that was given
Speaker 1: from BNL B and L at the time of the
Speaker 1: nineteen eighties was Italian owned state bank, and it gave
Speaker 1: almost two billion in loans to Iraq through a small
Speaker 1: branch in Atlanta. Now, why would an Italian bank, they
Speaker 1: don't bank, give big loans to Iraq through its Atlanta branch. Well,
Speaker 1: the loans were underwritten by the Department of Agriculture, and
Speaker 1: in the nineteen nineties it turned out that the Department
Speaker 1: of Agriculture Corporation. Those loan subsidies were actually heavily influenced
Speaker 1: by the CIA. There's a long story about that ended
Speaker 1: up being called Iraq Gate at the time in the
Speaker 1: nineteen nineties. But all of these loans, whether they were
Speaker 1: officially sanctioned or they came sort of by way of
Speaker 1: corporate quasi government loans, all of it means that Iraq
Speaker 1: ends up taking on enormous debt in the nineteen eighties
Speaker 1: and actually goes from being a net creditor to having
Speaker 1: a dead to GDP ratio of over two hundred and fifty.
Speaker 1: At the same time, obviously it goes to being a
Speaker 1: war economy, and the numero right and the denominated both
Speaker 1: gone the opposite direction. So Iraq from having double dig
Speaker 1: to growth in the seventies end up having negative growth
Speaker 1: all through the eighties and uses all of its money
Speaker 1: on on the war effort. So it's in that context
Speaker 1: that it goes from being a big net credits to
Speaker 1: being very very indented country. So Iraq basically has the
Speaker 1: goodwill of numerous actors in the Middle East as well
Speaker 1: as international actors like the US, like the UK, and
Speaker 1: it's basically fighting a proxy war against Iran, and these
Speaker 1: countries and actors are willing to fund it, and that
Speaker 1: starts the cycle of debt accumulation. But then at the
Speaker 1: end of the war, its economy is also suffering and
Speaker 1: so growth is slowing, and the debt to GDP ratio
Speaker 1: really starts to explode at that point, but of course
Speaker 1: it still has political goodwill on its side. But then
Speaker 1: side mean you wrote that something quite big changes and
Speaker 1: that's the point at which the debt actually becomes a problem.
Speaker 1: What was that trigger point? After the Iran Iraq war
Speaker 1: or really by the time of the end of it,
Speaker 1: the geopolitical landscape changes. One is obviously that the Soviet
Speaker 1: loses some of its influence in the world, and others
Speaker 1: that Iraq overplays its hand, so it is victorious militarily,
Speaker 1: but it ends up being a weak country in the
Speaker 1: end in the in the geopolitical sense. And even then,
Speaker 1: the dam after the war thinks that he has the
Speaker 1: power to actually be the new big hedgemon in the
Speaker 1: Middle East, so he starts to be more aggressive some
Speaker 1: of the loans that he considered grants from Kuwait. There
Speaker 1: is a dispute about that in the late eighties, and
Speaker 1: he uses it as a pretext to invade Kuwait, which
Speaker 1: ends up being the First Gulf War. At this point,
Speaker 1: nobody is really on iraq side anymore. They're due political
Speaker 1: support that was massive because nobody liked Iran after the
Speaker 1: Hostice crisis has completely eraporated. And not only that, everyone
Speaker 1: is afraid that after Kuwait, Iraq is gonna consider going
Speaker 1: into Saudi Arabia, which is heavily supported by the West.
Speaker 1: So Iraq is defeated, and instead of actually being able
Speaker 1: to service these loans because it can just keep getting
Speaker 1: money from its backers, it ends up starting to default
Speaker 1: because the entert payment start to add up. It needs
Speaker 1: to have more money for infrastructure. The reconstruction effort is
Speaker 1: massive after the Iran Iraq War, and oil exports sort
Speaker 1: of goes down quite dramatically. So it's in that context
Speaker 1: that after the First Gulf War the world comes together
Speaker 1: to sanction Saddam and put on not only sanctions but
Speaker 1: also war reparations. You have big liabilities that in instead
Speaker 1: of having the opportunity to roll over because it's easy
Speaker 1: to issue new debts, all of a sudden, the geopolitical
Speaker 1: wind of change means that they need to raise the
Speaker 1: money by themselves, and there is no way that having
Speaker 1: a debt to GDP ratio of over of which interest
Speaker 1: rate payment is quite high. The oil exports that they
Speaker 1: used to actually service the debt goes down because it
Speaker 1: becomes harder to do trade and they are hit with
Speaker 1: sanctions and reparations payments, which means that at this point
Speaker 1: the default is complete. And by the time that the
Speaker 1: official sanctions from the u N isolates Iraq from the
Speaker 1: global economy, default is complete in Iraq sort of stops
Speaker 1: any payments and withdraws from the global economy. So before
Speaker 1: we go further, at this point, you know, obviously, uh
Speaker 1: in recent years, we've seen sovereign debt restructurings and we've
Speaker 1: seen different players. You have different interests, including the prominent
Speaker 1: role that hedge funds or other private lenders have played
Speaker 1: and trying to make sure they get paid. At this point,
Speaker 1: is there much private ownership of iraqi sovereign debt? Is
Speaker 1: it in private hands or is it largely different states?
Speaker 1: And the CIA backed debt and you know, sort of
Speaker 1: political debt as you call it, which is really the
Speaker 1: height of indebtedness. The total liabilities, or if we start
Speaker 1: with total debt, you have eight billion which is direct
Speaker 1: debt to olway c D like countries meaning the West
Speaker 1: and the US. Then you have fifty billion, which is
Speaker 1: to golf states. These are the grants or the loans
Speaker 1: of which nobody can really agree on what they are.
Speaker 1: Then there are a bunch of smaller creditors which are
Speaker 1: also countries, and then ten billion which is commercial debt,
Speaker 1: which this sort of quasi bilateral. You don't really know
Speaker 1: who it is, but in the sources at the time.
Speaker 1: The commercial that also includes a wide variety of trade
Speaker 1: credits or export credits. This can be loans that small
Speaker 1: businessmen gave to Iraq or had lean's on and they
Speaker 1: are small, but they will obviously grow over time. But
Speaker 1: the main money owed here are to bilateral states, whether
Speaker 1: that being O E c D or Gulf countries. And
Speaker 1: there aren't really any hedge funds involved at the time.
Speaker 1: This was way before people started talking about restructuring in
Speaker 1: in terms of bolts of funds or anything like Argentina,
Speaker 1: so it was primarily worded that was highly political. Simon
Speaker 1: you say in the paper that you constructed, Um, I
Speaker 1: think it's the first chart of Iraqs debt to GDP
Speaker 1: ratio going all the way back to nine. Is that
Speaker 1: right correct? How did you actually go about doing the
Speaker 1: research for how much Iraq owed at these various points
Speaker 1: in time, because, as you point out, it's sort of
Speaker 1: a tangled web of obligations that they're weaving. Right. You
Speaker 1: have everything from uh sovereign creditors like the United States
Speaker 1: to a guy that you know imported a bunch of
Speaker 1: frozen chickens into Basrah and wants to get paid. So
Speaker 1: how did you actually go about accumulating all that data.
Speaker 1: One of the things when you do restructuring is that
Speaker 1: normally you know who's actually owed the money. So in
Speaker 1: most sovereign restructurings, the main issue is external debt, which
Speaker 1: is bonds held at either Europe, CLEO ord GCC. You
Speaker 1: actually know who owns the bond and you can get
Speaker 1: them together and make an offer or start negotiations. In Iraq,
Speaker 1: all of the debt was incurred before, which means that
Speaker 1: they were all loans they had been delinquent on for
Speaker 1: a long time, and Iraq had been isolated and under
Speaker 1: a severe bombardment by two thousand three, So it's actually
Speaker 1: kind of hard to find out who's actually owed a
Speaker 1: lot of money. So one of the first things that
Speaker 1: the I m F and the Treasury did when they
Speaker 1: came in was to try and get a sense of
Speaker 1: who's actually owed all this money. And I start from
Speaker 1: taking all of their hard work and say how much
Speaker 1: was actually restructured in two thousand and six. So let's
Speaker 1: assume that you are owed something, obviously you want to
Speaker 1: get paid. The way to get paid is during the restructuring,
Speaker 1: you come forward and tell them I am owed X
Speaker 1: and Y, and then we can work our way backwards
Speaker 1: from there. So I take the it's to stop from
Speaker 1: there and then work my way backwards to try and
Speaker 1: find out where are these loans actually placed in time.
Speaker 1: And there's an incorrect sign, so obviously some of the
Speaker 1: bigger loans we know which were where they were from.
Speaker 1: It's easier when it's corporate or commercial loans because oftentimes
Speaker 1: there are contracts, but if it's handshake deals, which sometimes
Speaker 1: they are, it's a little bit hard. So what I
Speaker 1: did was to take all the nominal amounts that were
Speaker 1: restructured and then work my way backwards to try and
Speaker 1: place them in time, and then see where do they originate,
Speaker 1: where can we place them? And all of the loans
Speaker 1: really are coming from the time during the Iran Iraq War.
Speaker 1: That's a matter of trying to place them and then
Speaker 1: find out what were the original loan amounts, how much
Speaker 1: were they owed after what would the interest rates, and
Speaker 1: then try to discount forward. And you describe your work
Speaker 1: in the paper as I havn't done an oral history
Speaker 1: of this because again it's so complicated. So what was
Speaker 1: your process? Who did you go out and talk to
Speaker 1: to actually sort of reconstruct the whole process. Yeah, So
Speaker 1: that was that one, trying to find out the debt
Speaker 1: history of Iraq because there was really no one who
Speaker 1: had done a comprehensive study covering all the time from
Speaker 1: nineteen seventy nine to two thousand and three. There were
Speaker 1: some bits pieces here, obviously, I for from some of
Speaker 1: the great works that's been done before, but getting to
Speaker 1: the debt history up until two thousands three only got
Speaker 1: me so far. The second part was to actually look
Speaker 1: at the restructuring. So the oral history is that I
Speaker 1: went out and I talked to everyone who were actually involved.
Speaker 1: So this would be the lawyers, this would be the bankers,
Speaker 1: the officials who were involved for the UK, the US
Speaker 1: governments who actually conducted the negotiations, and then a lot
Speaker 1: of primary sources. So you have all of the press releases,
Speaker 1: you have all the negotiation papers, you have all of
Speaker 1: the restructured and conciliation documents that you can go see.
Speaker 1: So a lot of the loans that I found and
Speaker 1: trace back were actually from documents that were given during
Speaker 1: the restructuring so that they could get paid and then
Speaker 1: try to work backwards who were the banks So that BNL,
Speaker 1: for example, the c I A Link loans from the
Speaker 1: eighties was restructured in two thousand and six as part
Speaker 1: of by that time at BNP party boss claim on Iraq,
Speaker 1: which had just been on a non performing loans on
Speaker 1: its book for almost twenty years. Well let's talk about
Speaker 1: the restructuring then, um, because we're we've been building up
Speaker 1: to that point. So I guess in the early two
Speaker 1: thousand's everyone certainly remembers, um what happened with the US
Speaker 1: invading Iraq, and after that the restructuring really begins in
Speaker 1: two thousand three. So how does that process kick off
Speaker 1: and what were the motivations of actually doing the restructuring.
Speaker 1: There are a few ger bring accounts on what the
Speaker 1: motivations actually were. Now, I would put them broadly in
Speaker 1: two categories. One was moral or political, and they are
Speaker 1: sort of together in that it was part of the
Speaker 1: reconstruction program where the US led coalition would like to
Speaker 1: get Iraq rebuilt. Obviously, there was a big that overhang,
Speaker 1: and the government at the time was heavily favoring market
Speaker 1: forces and they wanted Iraq to be part of the
Speaker 1: global economy. Again, it's a lot easier if you don't
Speaker 1: have a lot of outstanding credits that can be attached
Speaker 1: by various creditors at any times. That they wanted to
Speaker 1: clear it up so that Iraq could regain entry. That
Speaker 1: is sort of the political part. The second part was
Speaker 1: was more moral in the sense that this was they
Speaker 1: had liberated Bush and Cheney had liberated Saddam and Iraq
Speaker 1: from Saddam, and they thought that the debt should not
Speaker 1: be carried over. So this is where the odious dead
Speaker 1: part comes in. There are differing accounts as to how
Speaker 1: big affects this actually was at the time, and I
Speaker 1: will say that depending on who you talk to. Some
Speaker 1: people say that it wasn't important at all, and some
Speaker 1: people will say that it was very important. There were
Speaker 1: several official statements of the Treasury Secretary did say that
Speaker 1: they considered declaring that that odious, but they wanted it
Speaker 1: for both moral and political political reasons. So what did
Speaker 1: they actually do. Well, if we take our mind back
Speaker 1: to two thousand three when they actually tried to make
Speaker 1: the invasion legal, the first U N resolution actually had
Speaker 1: very important provisions in for the debt restructuring, which was
Speaker 1: that it immunized all of Iraqi the assets from credits
Speaker 1: to attachment. This is fairly big and not something that's
Speaker 1: normally done in sovereign debt restructuring, and it's important because
Speaker 1: Iraq had lots of oil assets that were abroad and
Speaker 1: if all of a sudden creditors started to come out
Speaker 1: of the woodwork and say we want to get paid
Speaker 1: on our money on our debt, then they could start
Speaker 1: to attach these oil assets. So it was enshrined into
Speaker 1: un law that Iraqi assets were immunized from credits attachment,
Speaker 1: which was sort of the step one and was part
Speaker 1: of the discussions from even before the invasion. Now, after
Speaker 1: that it got a pretty big push from the economic
Speaker 1: part of the invasion. For so, the c p A,
Speaker 1: the provisional government that the u that the coalition set up,
Speaker 1: had an economic office, of which it had a couple
Speaker 1: of big projects, of which debt restructuring was was one
Speaker 1: of the main ones. So it was from early on
Speaker 1: agreed that there would be a debt restructuring. And you
Speaker 1: can see if you go back Bush the Treasure Security
Speaker 1: cherry Snow, they all talked about this is a priority
Speaker 1: in the reconstruction of Iraq. Okay, So we have the
Speaker 1: u N statement immunizing domestic energy assets from being seized
Speaker 1: by creditors. We have the rhetoric about wanting some sort
Speaker 1: of restructuring and some talking about how this debt should
Speaker 1: be seen as odious and therefore canceled. What was the gap,
Speaker 1: if any, between the rhetoric that we heard from the
Speaker 1: Bush administration versus what actually got put into practice in
Speaker 1: terms of the restructuring and where did that Where did
Speaker 1: things break down in that respect. I don't know if
Speaker 1: they really broke down, but they started earlier. They started
Speaker 1: early on to to talk about how do we actually
Speaker 1: want to do this restructuring. So there are a couple
Speaker 1: of different ways you can go a bottle restructuring. Obviously,
Speaker 1: Iraq had three big credit groups. One was the Paris
Speaker 1: Club people. These are the O E C D developed
Speaker 1: countries who are bold money directly, a lot of negotiations
Speaker 1: stopt there. And there was the commercial creditors which were
Speaker 1: owed money. And then the bilateral governments which are all
Speaker 1: the non Paris Club, which mainly means in this instance
Speaker 1: of golf states in China and the US had enormous
Speaker 1: political power to put behind pushing for a deal, especially
Speaker 1: at the Paris Club. So this is where they started,
Speaker 1: and they went to the Paris Club saying that we
Speaker 1: want as much debt right down as is possible. And
Speaker 1: this is where the context about the time of negotiations
Speaker 1: is important. So it varies enormously how big haircut government
Speaker 1: credits is actually take on their somhere in debt. So
Speaker 1: we have stories about as low as less than twenty
Speaker 1: percent haircut as was the case in Urugu are to
Speaker 1: almost eighty, which is the case of Argentinean the Argentinean
Speaker 1: restructuring in two thousand and five. Obviously there were things
Speaker 1: happening after that, but just in terms of the haircut
Speaker 1: that credit is take. It was actually during the time
Speaker 1: more credits of friendly restructurings that were the normal. Obviously,
Speaker 1: going out and saying we would like your debt to
Speaker 1: be restructured at somewhere around haircut was a pretty big
Speaker 1: ask at a time when creditors actually had a lot
Speaker 1: of power to say that. So the initial talk is
Speaker 1: where do we actually go about during the restructurings and
Speaker 1: how can we use the political muscle to push it through.
Speaker 1: This is where you have the two groups of people
Speaker 1: who are normally involved in restructurings. So this would be
Speaker 1: the im s and the U S treasuries and the
Speaker 1: bankers and the lawyers of the world who want to
Speaker 1: do a normal restructuring where you do either at debt
Speaker 1: for debt swap or at debt for cash swap. You
Speaker 1: do it through the normal channels of negotiations, or you
Speaker 1: had the non standard players, so the White House, the Pentagon,
Speaker 1: all of the grassroots organizations who say, you know what,
Speaker 1: all this death that Iraq has, we want you to
Speaker 1: declare it odious because it is not moral to pay
Speaker 1: it at all. The debt was not for the people,
Speaker 1: It had no benefit. It was for the personal enrichment
Speaker 1: of that I'm who signed and it was really used
Speaker 1: for a political war in which the citizens of Iraq
Speaker 1: didn't really play a big role. So it's the clash
Speaker 1: of those two and both of them came out in
Speaker 1: the same way in the sense that they wanted it
Speaker 1: that right down to be big. But whether you go
Speaker 1: through a normal restructuring process, whether you declare the dead odious,
Speaker 1: have two very different outcomes. So there's this internal battle
Speaker 1: between the groups, and as you might have guessed, the
Speaker 1: I m F and the treasuries and the people who
Speaker 1: are actually involved ends up being on top. And the
Speaker 1: reason is that they convinced everyone else that one this
Speaker 1: is how that restructuring should work. We don't really want
Speaker 1: to open the can of worms of star adding to
Speaker 1: declare sovereign debt odious, and we can get a big
Speaker 1: right down anyway. So they went out and said, you
Speaker 1: know what, we can probably get haircut. We think that
Speaker 1: it's not needed to be declared odious. And in the end,
Speaker 1: the opening gambit from the coalition side at the Paris Club,
Speaker 1: which is where sovereign debt negotiations are negotiated at the
Speaker 1: Paris Treasury, the French Treasury in Paris. Our opening gambit
Speaker 1: is that we're going to say we can get hair cut.
Speaker 1: Obviously it ended up a little bit lower, but the
Speaker 1: US and the UK when pretty hard and said, you
Speaker 1: know what, we can we can do it the normal
Speaker 1: way and we can get where you want us to be.
Speaker 1: The other side of that was all of mostly the Europeans,
Speaker 1: so the Russian and the German and the French, who
Speaker 1: thought that haircut was actually a little bit excessive, they
Speaker 1: thought is better. And the US was not really a creditor,
Speaker 1: so while they had political muscles, they didn't really have
Speaker 1: much that they only had four billions, and they end
Speaker 1: up doing it in in the takes many months negotiation
Speaker 1: back and forth. It ends up being agreed at a
Speaker 1: stummit in Chile between Putin and Push, where Push has
Speaker 1: to personally push Putin at three separate meetings at the
Speaker 1: margins of the summits actually get a get a deal,
Speaker 1: and the deal they get is fairly harsh on creditors.
Speaker 1: So they end up with haircut which comes in three trenches,
Speaker 1: and they do it in a way that not actually
Speaker 1: normal for the Paris clubs. So there is this idea
Speaker 1: about flow treatment and stock reduction. So normally you take
Speaker 1: the flow treatment first. Now this wasn't really an issue
Speaker 1: for Iraq because they didn't really pay interest on the loans,
Speaker 1: but you don't really write down the dead until all
Speaker 1: of the conditions are met. The that reduction came, you
Speaker 1: sent up front, and then the IMF got involved over
Speaker 1: two times to actually helped provided that sustainability analysis, which
Speaker 1: by the Europeans at the time were considered a work
Speaker 1: of fiction because it's underscored how much revenue would come
Speaker 1: from oil and it was a rigid assumption that didn't
Speaker 1: change at all. But they ended up taking an ad
Speaker 1: net person value reduction on all of the debt of
Speaker 1: just under nine which by the time is far higher
Speaker 1: than any other sovereign debt restructuring in the last twenty years. Okay,
Speaker 1: so haircut of about how replicable would such a debt
Speaker 1: restructuring b again, because it seems like this one is
Speaker 1: fairly unusual in the sense that you had the u
Speaker 1: N which somehow was able to immunize or protect Iraq's
Speaker 1: biggest assets, which were tied to its oil industry. And
Speaker 1: then you also have this big player, this big influential
Speaker 1: player in the form of the US actively lobbying for
Speaker 1: the best possible terms for Iraq, and I should just
Speaker 1: mention also you had one of the best debt restructuring
Speaker 1: lawyers around and also a previous all Thoughts guest Lee
Speaker 1: Bookite over at Cleary Gottlieb or formerly of Cleary Gotlieb,
Speaker 1: representing Iraq. So all these great things going for Iraq
Speaker 1: when it comes to this debt restructuring. So is it
Speaker 1: just an isolated incident of one of these things going
Speaker 1: right for once? I think it's an isolated incident in
Speaker 1: the sense that at the Paris Club they had the
Speaker 1: political backing off a coalition which we're all on the
Speaker 1: same side and mostly represented the big creditors. They had
Speaker 1: the u N resolution, which meant that it was really
Speaker 1: hot for the creditors to do anything. There were no
Speaker 1: remedies to actually enforce the debt. And this not only
Speaker 1: the sovereign debt, but Iraq during the sanctions period had
Speaker 1: sort of the quality of Iraq had morphed into everything
Speaker 1: being under the states. So it wasn't just the state
Speaker 1: liabilities that were being restructured. It was also the quasi bank,
Speaker 1: the quasi governmental organizations, so such as the big banks
Speaker 1: and the u N Revolution Resolution really stopped anyone from
Speaker 1: trying to enforce the credits of right, which meant that
Speaker 1: a lot of people didn't engage. So whereas in Argentina
Speaker 1: you have Hetch funds like Elliott coming in seeing that
Speaker 1: we can make a good argument that we should be
Speaker 1: paid more than the restructuring offer. Because there were no
Speaker 1: remedies for creditors to actually force Iraq to pay, they
Speaker 1: didn't They didn't really engage, which meant that it is
Speaker 1: unique in the sense that it was very easy to
Speaker 1: actually get everyone to pay. So after the Paris Club
Speaker 1: negotiations were conducted, the commercial restructuring was a little bit
Speaker 1: easier in the sense that there was a comparability of
Speaker 1: treatment costs in the Paris Club, meaning that no other
Speaker 1: creditors could get a better deal, which meant that you
Speaker 1: could go out to everyone and say, if you are
Speaker 1: owed money, this is the best deal that you're going
Speaker 1: to get, and if you don't take it, you can
Speaker 1: try and see us. But there is a immunization agreement
Speaker 1: at the u N which means that you're probably going
Speaker 1: to have to wait fifteen years to have a chance,
Speaker 1: and by that time who knows, and it would cost
Speaker 1: a lot of lawyers, and it will cost a lot
Speaker 1: of waiting, whereas we can give you on your notional
Speaker 1: and then also pay a crude interest on any loans
Speaker 1: which is not insubstantial. So they ended up paying library
Speaker 1: plus seventy five basis point from the time of the
Speaker 1: same actions, in which you know, a cruise at a
Speaker 1: at a pace. They got everyone to agree, really of
Speaker 1: all creditors took the deal, and there were no one
Speaker 1: who really stood out and tried to say, we don't
Speaker 1: want it, we're going to sue, we're not going to engage.
Speaker 1: The people who were really unhappy were, on the other hand,
Speaker 1: people who thought that this is a list opportunity in
Speaker 1: the sense that we could have done the odious that
Speaker 1: discussion and actually try to use the political power behind
Speaker 1: this particular restructuring to say, you know what, we are
Speaker 1: going to try and enshrine it in international law. And
Speaker 1: it is not moral that they are paid at all,
Speaker 1: because this was not money that really was owed in
Speaker 1: good faith. So talk about that. What would have been
Speaker 1: in so you some alternate history, what might have been
Speaker 1: the ramifications mentioned the Pandora's box if they had enshrined
Speaker 1: this concept that some debt is inherently odious and there's
Speaker 1: not necessarily moral to pay it back. Had that concept
Speaker 1: would have been put into application with Iraqi debt restructuring,
Speaker 1: what might that have meant uh subsequently for subsequent restructurings.
Speaker 1: I think it really would have been Pandora's box in
Speaker 1: the sense that we don't know, but there were fairly
Speaker 1: serious discussions to the top of the US government about
Speaker 1: actually starting to do this. So if you go back
Speaker 1: at the time the think tank and policy world, among
Speaker 1: them academics, there is a big discussion about actually declaring
Speaker 1: the debt odious, and there are overtures in that direction,
Speaker 1: And it would have meant that other people lending money
Speaker 1: to desperates around the world would have had to think
Speaker 1: twice and not just say, oh, you know what. Idea
Speaker 1: of sovereign debt is that the intergenerational loans of one
Speaker 1: government is honored by the next government, which is really
Speaker 1: one of the main foundations in international finance at the time.
Speaker 1: You would have had to step back and say, okay,
Speaker 1: so if you lend money to a desperate or a dictator,
Speaker 1: the international law is there might be an argument that
Speaker 1: you should not get your money back. Obviously, there are
Speaker 1: lots of people with interest in one way or the other.
Speaker 1: So you know, it's hard for me to say what
Speaker 1: would actually happen, but I think it could have been
Speaker 1: one of the few instances of which you would have
Speaker 1: had a chance. Because the powers that be were so
Speaker 1: uniformly behind Iraq and getting proper debt relief at the time,
Speaker 1: they were able to create a new approach at the
Speaker 1: Paris Club, the Ebing approach, which was a way to
Speaker 1: not take the standard template of debt restructuring but actually say,
Speaker 1: for highly embedded, low income countries we have we can
Speaker 1: do a special way of actually looking at what do
Speaker 1: they need. You had us who ended up writing off
Speaker 1: all of their depths, so they wrote off everything after
Speaker 1: the restructuring, and there was the U N resolution. So
Speaker 1: all of it comes together as to say this was
Speaker 1: very This was unique restructuring in that the creditors were
Speaker 1: just immensely successful and actually writing it off and ending
Speaker 1: with a with a clean slate, but under the terms
Speaker 1: of the old sovereign debt restructuring. So it was successful
Speaker 1: if we say, okay, compared to every other restructuring that's
Speaker 1: been in the last hundred years, and it went very smoothly,
Speaker 1: everyone agreed, no one sued. But it could have been more.
Speaker 1: It could have been a way to actually create a
Speaker 1: new restructuring mechanism or bankruptcy court to settle these things
Speaker 1: going forward. And it was a unique opportunity in let
Speaker 1: is it weird that, I mean a lot of this debt,
Speaker 1: as your paper points out, was incurred in the nineteen
Speaker 1: eighties when Iraq was fighting against Iran with the support
Speaker 1: of a lot of it's creditors who were actually giving
Speaker 1: it money in order to do this, And then I
Speaker 1: guess twenty years later, those same creditors are suddenly talking
Speaker 1: about that debt as odious debt. Is it weird to
Speaker 1: see that sort of progression in the way people were
Speaker 1: thinking about that money. I think it's a little bit
Speaker 1: like your politics. People used to be your enemies, they
Speaker 1: are now your friends, and then they can become enemies.
Speaker 1: And a lot of the money was really thrown after
Speaker 1: Iraq because there was plenty to go around, and the
Speaker 1: whole idea about supporting satellite states or allied to do
Speaker 1: proxy wars in the Middle East was just fairly normal
Speaker 1: and I mean to an extent, many of the issues
Speaker 1: that we have here that are you know, shown especially
Speaker 1: in the early years I'll fill with us. So you know,
Speaker 1: Iran and Iraq are in the news today. A lot
Speaker 1: of the issues were not really resolved in any way.
Speaker 1: The old debt was restructured into new debt, but they
Speaker 1: underlying political and religious and power struggles really dis continued.
Speaker 1: So in that sense, probably not so. One of the
Speaker 1: questions that always arises when you have a sovereign debt restructuring,
Speaker 1: and particularly in more contentious ones where you have some
Speaker 1: creditor tried to get money, is like, well, in the end,
Speaker 1: like how do you really get a government to pay
Speaker 1: money their sovereign country. They could do whatever they want.
Speaker 1: International law is sort of a weak, nebulous concept at
Speaker 1: best in many cases though, Like say, what we've seen
Speaker 1: with Argentina is that the money is raised initially or
Speaker 1: the bonds are sold through major financial centers, so maybe
Speaker 1: through New York or through London. It doesn't sound like
Speaker 1: that was the case in uh in the Rock, where
Speaker 1: a lot of this debt was just incurred by laterally
Speaker 1: through different states or the CIA or whoever. But talk
Speaker 1: to us about the difference interest structuring when the if
Speaker 1: the debt was incurred through some major financial center with
Speaker 1: a sort of more robust legal framework for settling this stuff. Yeah.
Speaker 1: So one of the one of the main or the
Speaker 1: main difference between owing money to a sovereign versus to
Speaker 1: a corporation is that if you owe money to a
Speaker 1: corporation or a household, there is a bankruptcy chord, you
Speaker 1: can take them to cold, you have remedies, you know,
Speaker 1: there is a there is a way to actually get
Speaker 1: the money, whereas Summer states, it doesn't really work like that.
Speaker 1: In the last two hundred years or really before that.
Speaker 1: The idea that you sent in the gunboats was that
Speaker 1: you saw times just had to force people to pay,
Speaker 1: and there really isn't a way to force sovereigns to pay,
Speaker 1: or at least historically there hasn't been. So why do
Speaker 1: sovereigns pay interest undebt. Well, it really comes down to
Speaker 1: mainly one or two things. One is reputation, And by reputation,
Speaker 1: I mean it's nice to be able to smooth your
Speaker 1: consumption or borrow money if you need to buy something,
Speaker 1: and if you don't pay your credits as well. The
Speaker 1: chance that they're going to lend you money next time
Speaker 1: is probably a lot smaller one. So countries just do
Speaker 1: it out of self interest because it's a lot easier
Speaker 1: to pay the interest on your debt knowing that you
Speaker 1: can go to the market again. So this is sort
Speaker 1: of the reputational idea. Second, theary sanctions, so historical analogy
Speaker 1: would be that you're put in debt at prison, but
Speaker 1: you could also just be forced so in the it's
Speaker 1: just a matter of raw power often where one country
Speaker 1: forced another one to pay. All this really changed in
Speaker 1: the last shall would say thirty forty years with the
Speaker 1: rise of financial centers. So in New York, in Hong Kong,
Speaker 1: in London, most money flows through one way or the other.
Speaker 1: So if all of the sudden, the laws of London
Speaker 1: or English law or New York law suggests that if
Speaker 1: your money touches New York, you have to abu by
Speaker 1: certain rules, which means that you can have cases like
Speaker 1: Argentina where even though none of the creditors or the
Speaker 1: debtor were really in New York, the judge in the
Speaker 1: case sat in New York. It could really say yes,
Speaker 1: but all money flows through here at some point and
Speaker 1: I'm going to slab motions on it if it does,
Speaker 1: which means that the creditors do have certain remedies to
Speaker 1: all the sudden force countries to pay. Obviously, they were
Speaker 1: circumvented in Iraq, which makes this unique compared to some
Speaker 1: of the more different cases that we have and mix
Speaker 1: it maybe not a good template, but at least good
Speaker 1: inspiration for some of the cases that we will see
Speaker 1: I think going forward shortly, so two obvious countries that
Speaker 1: have issues sort of similar. It's one Venezuela, which is
Speaker 1: obviously insolvent and has lots of assets abroad, oil assets
Speaker 1: both in the US direct with their oil company, but
Speaker 1: also just oil assets abroad, and they're going to have
Speaker 1: to find a way to restructure their debt and make
Speaker 1: sure that they don't end up having the same issues.
Speaker 1: The other one is Lebanon, which has a lot of
Speaker 1: that which is both foreign and domestic, and they have
Speaker 1: a dollar peck currency. I know you have Paul McNamara
Speaker 1: on to talk about Lebanon a couple of weeks a
Speaker 1: month ago, suggesting all the various issues, and they come
Speaker 1: from the same idea that you need to find a
Speaker 1: way to make sure that the restructuring actually works and
Speaker 1: you don't get entangled in all the legal issues that
Speaker 1: can that can come afterwards. So in the process of
Speaker 1: doing your research, did you come across any like interesting
Speaker 1: um instances or anecdotes about the commercial creditors. One of
Speaker 1: the things is that the lawyers looked at precedents of
Speaker 1: how do you actually find out whose owed money on
Speaker 1: the commercial side. So I found out that the commercial
Speaker 1: credit doors range from the big banks and there were
Speaker 1: many European banks owed money like we talked about before,
Speaker 1: but also just lots of trade credits and people owed
Speaker 1: money for small things like uh export delivered just before
Speaker 1: the sanctions. And they did struggle about how to actually
Speaker 1: do it. So one of the things that they've been
Speaker 1: talking about was how not to do it. So one
Speaker 1: and one story is that in Nigeria ordered sixteen million
Speaker 1: tons of cements to arrive within a ship within a
Speaker 1: year for their harbor or for their to to plug
Speaker 1: a shortage. They hadn't really made the calculation correctly, so
Speaker 1: it was far in excess of what they actually needed
Speaker 1: to needed to receive. The result was a run up
Speaker 1: and trade debt that needed to be settled, and the
Speaker 1: government took out a newspaper ad asking anyone owed money
Speaker 1: to contact them. Now, obviously a lot of people contacted them,
Speaker 1: and Nigeria was inundated with claims and it really entangled
Speaker 1: the debt reconcilia. It really was a debt reconciliation nightmare,
Speaker 1: and it ended up settling only one third of the claim.
Speaker 1: So in the commercial settlement or reconciliation reconciliation and part
Speaker 1: of the restructuring, they set out some very formal rules
Speaker 1: of how could you actually deliver a claim to make
Speaker 1: sure that you don't end up with just taking ads
Speaker 1: out in newspapers hoping that anyone could just say, Hey,
Speaker 1: I have hot money. I love that. It's it's sort
Speaker 1: of the complete opposite to the normal situation to have
Speaker 1: request for money actually flowing into Sigeria rather than out
Speaker 1: of it. I know, I wonder if that's the original
Speaker 1: idea for the Nigerian Prince Nigerian Princess. Yeah, okay, Well,
Speaker 1: so a really fascinating saga of debt restructuring and one
Speaker 1: that could hold clues as to the future paths of
Speaker 1: two emerging markets that are possibly on the brink of
Speaker 1: deep fault. Simon Hendrickson, Thank you so much for coming on,
Speaker 1: Thank you for having me. Thanks Simon. That was great,
Speaker 1: So Joe I really enjoyed that conversation. Brings together, of course,
Speaker 1: a lot of the themes that we've discussed on previous
Speaker 1: All Thoughts episodes, but it seems especially relevant in the
Speaker 1: context of what's going on in Venezuela but also Lebanon.
Speaker 1: So it's nice to think about the Iraq example, whether
Speaker 1: or not it could be a blueprint for future restructurings,
Speaker 1: or whether or not it was really an isolated special case. Yeah,
Speaker 1: I mean, there are certainly aspects of it that feel
Speaker 1: extremely isolated. The fact that so much of the debt
Speaker 1: was sort of two official UH entities like other governments
Speaker 1: that didn't have particularly uh much reason to extract a
Speaker 1: high price you have to figure out be difficult. We
Speaker 1: know there's a lot of UH dead held in countries
Speaker 1: like Venezuela and Lebanon, where you know, there's like they're
Speaker 1: held by a money manager that has to uh earn
Speaker 1: some return or it has clients. But nonetheless sort of
Speaker 1: a fascinating look at just the sort of unusual circumstances,
Speaker 1: and we never really talked about the rocrat structuring at all,
Speaker 1: which I guess is kind of the point of Simon
Speaker 1: having done the research. Yeah, exactly do you think that
Speaker 1: odiousta is ever going to get enshrined as a legal concept?
Speaker 1: I mean, the problem is there's inherently going to be
Speaker 1: an element of subjectivity, right, how much is the leader
Speaker 1: really representing the will of the people? How much was
Speaker 1: it for the benefit of the people, the spenditure of
Speaker 1: the debt that was incurred. It obviously makes a certain
Speaker 1: amount of moral or logical sense that yeah, why should
Speaker 1: people who are born today have to or you know,
Speaker 1: deal with the debts incurred by a past dictator. But
Speaker 1: it seems so hard to imagine there will ever be
Speaker 1: a point when people say, okay, yeah, you get to
Speaker 1: write this off because of the Pandora's box that Simon described.
Speaker 1: What do you think, um, what do I think? I think, Well,
Speaker 1: this is sort of what I was getting with that
Speaker 1: question about how come all the debt incurred in the
Speaker 1: nineteen eighties was okay as long as Iraq was seen
Speaker 1: as beneficial to the international community in the sense that
Speaker 1: it was fighting against Irany and hedgemony. But then suddenly
Speaker 1: after it invaded Kuwait, and it became very very clear
Speaker 1: that Hussein was a bad guy. Suddenly that same money
Speaker 1: can be considered possibly odious. So you sort of have
Speaker 1: this fluidity of debt, right Like, debt can exist for many,
Speaker 1: many decades, and in that period of time, the reasons
Speaker 1: it exists can change, and they can switch from possibly
Speaker 1: moral to possibly immoral. It does seem like it must
Speaker 1: be one of the most complicated concepts in all of
Speaker 1: international finance. The idea of actually defining odious debt and
Speaker 1: actually trying to put it into law, I can't even imagine. Yeah,
Speaker 1: and I think that's what makes even current debt restructurings
Speaker 1: so interesting to watch. So set aside the moral question,
Speaker 1: they're just so complicated because the legal frameworks are unclear.
Speaker 1: The moral questions about extracting real resources from an economy
Speaker 1: that's obviously distressed in the first place, because otherwise it
Speaker 1: probably wouldn't be in this situation very interesting. Uh. I
Speaker 1: think that is partly why you know these will always
Speaker 1: be inherently complicated. Yeah, but again, we might actually have
Speaker 1: a chance, I guess, to revisit the odious det concept
Speaker 1: um when uh, well, in the context of Venezuela, So
Speaker 1: that'll be an interesting one to watch. Absolutely, should we
Speaker 1: leave it there? Let's leave it there quote. This has
Speaker 1: been another episode of the Odd Thoughts Podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why is It Thal? You could follow me
Speaker 1: on Twitter at the Stalwart and be sure to follow
Speaker 1: our guests on Twitter. Simon Hendrickson. His handle is at
Speaker 1: Simon h Underscore d K, and be sure to follow
Speaker 1: our producer on Twitter, Laura Carlson. She's at Laura M. Carlson.
Speaker 1: Followed Francesca Levia, the Bloomberg head of Podcasts, at Francesca
Speaker 1: Today and check out the whole family of Bloomberg podcasts
Speaker 1: on Twitter under the handle at podcasts. Thanks for sing