postings by Anna Gelpern

D-DebtCon 2020 Starts in Pretoria Labor Day Monday 9 AM EDT

posted by Anna Gelpern

DebtCon4 (aka the 4th Interdisciplinary Sovereign Debt Research and Management Conference) was all set to meet at the European University Institute tomorrow ... then #2020 tried to one-up snowzilla. But DebtCon does not quit--certainly not when exports crater, inflows turn into outflows, and debt levels go through the roof around the world--DebtCon doubles down, marches on, and smites the plague with a truly humbling show of global cooperation.

When DebtCon4 in Florence had to be postponed to 2021, ten host committees around the world miraculously reconstituted as the first-ever virtual Distributed DebtCon (#DDebtCon), a two-week sovereign debt-a-thon spanning nine countries,* five time zones, and every continent save for Australia and Antarctica. 

*We counted - (1) Argentina, (2) Barbados, (3) China, (4) Italy, (5) Singapore, (6) South Africa, (7) Switzerland, (8) UK, (9) US - plus global and regional host organizations, including III (also co-sponsoring the event), CEPR, and ABFER.

Continue reading "D-DebtCon 2020 Starts in Pretoria Labor Day Monday 9 AM EDT" »

Keeping Cosy by the Dumpster Fire: Argentina Reads Its Contracts ... Twice ... Quel Scandale!

posted by Anna Gelpern

Argentina's capacity to trigger outrage in sovereign debt circles is to behold. After nine defaults, thousands of lawsuits, and enough intrigue and screaming matches to break Big Data, wouldn't you think that someone somewhere would learn to yawn at another Argentina debt drama. And yet ... on the eve of tomorrow's debtapalooza, the internet is hopping mad again about a restructuring proposal from Bueons Aires--not the money (that's regular old mad), but the red-hot-appalling abuse of the shiny new Collective Action Clauses (CACs) in the 2016 bond indenture. The government again managed to tick off both its private creditors, who discovered that their contracts let the debtor gerrymander bond voting pools after the vote, and the well-wishing policy wonks watching their baby--decades of international bond contract reform--swirl down the drain with this one deal's bathwater. Because much of the technical ground was ably covered by my colleagues earlier this evening (don't miss the link to Rodrigo Olivares-Caminal), I have the luxury of using the rest of this post to speculate about the implications of the brouhaha for sovereign debt policy and sovereign debt markets.

Continue reading "Keeping Cosy by the Dumpster Fire: Argentina Reads Its Contracts ... Twice ... Quel Scandale!" »

Keeping Cosy by the Dumpster Fire: A Sovereign Debt Series

posted by Anna Gelpern

Lest anyone thought they could quarantine or protest in peace, no such luck in the sovereign debt world.

Remember when everyone thought a standstill starting May 1 was a great idea, at least through the rest of 2020? For all the good will, May 1 has come and gone, with few takers and fewer givers.

On the subject of give-and-take -- with another default in the rear view mirror, Argentina's government and its creditors are edging closer to a deal this week ... unless their talks get bogged down in extreme distrust, undo more than two decades' worth of sovereign debt contract reform, and drag the rest of the world off the cliff with them ... which would surprise exactly no one who has ever followed that dysfunctional marriage. 

Speaking of no one -- no one seems to have a handle on who owes what to whom on what terms -- not with any precision, in any event -- which is an awkward place to be when pitched warnings of a mega-debt crisis migrate from research volumes to the New York Times.  And no, it is not all China's fault, it's a structural problem with this ecosystem.

Meanwhile, fears of worldwide sovereign debt distress seem to be driving comparisons to the 1980s, which in turn mean different things to different people -- a banking crisis and a Lost Decade to some, market-based (aka publicly subsidized) debt operations to others, and giant shoulder pads to the rest. 

And yet--against predictions and barring classification error--markets have been lending up a storm to vulnerable countries without bothering too much about their contracts.

All this begs two questions--what gives, and what do we do now? -- that are the subject of what should be an excellent Sovereign Debt Forum panel on Wednesday morning, led by Rosa Lastra at Queen Mary, co-sponsored with Georgetown IIEL, and including all the usual suspects. Of course I have no answers, but I will try to noodle these and related questions here in the next few days. In particular, I want to unpack what might have gone wrong with the G-20 call for a standstill, ask whether Argentina's debt restructuring threatens international financial architecture, and yell a bit about our collective obsession with Default ... among other things that will surely come up in the next 24 hours. 

Now That Everyone Is on the Standstill Bandwagon ... Where to? Part II

posted by Anna Gelpern

Delivering pandemic-fighting resources through debt relief channels poses at least three overlapping implementation challenges--no bandwidth today, Groundhog Day tomorrow, and inter-creditor equity forever--in addition to the challenge of monitoring the use of proceeds I flagged in Part I. I sketch these three below, alongside three possible solutions -- a model standstill agreement for all kinds of debt, retrofitting contingent standstill terms in all kinds of debt contracts, and a standing sovereign debt coordinating group.

Continue reading "Now That Everyone Is on the Standstill Bandwagon ... Where to? Part II" »

Now That Everyone Is on the Standstill Bandwagon ... Where to? Part I

posted by Anna Gelpern

A sovereign debt standstill might not cure COVID-19, but it sure seems like the one thing we can all agree on.

In the run-up to last week's all-virtual IMF-World Bank-G-20 meetings, a chorus of private and public sector, NGO, think tank and academic voices (me included) had called for some version of a pandemic-themed pause on sovereign debt payments. Hardly anyone opposed the idea in public, but relief proposals ran the gamut from ambitious to cosmetic, and it took intense negotiations to get the G-20 to agree on a relatively modest NPV-neutral eight-month respite for the world's poorest countries.  Perhaps most importantly, Saudi Arabia was in the chair and China signed on, signaling that the new(ish) creditor cohort might be taking ownership of the global sovereign debt regime alongside the old bilateral and multilateral creditors. If they follow through, it is a major achievement, and a long overdue first step. The fact that a big financial industry group worked closely with the G-20 and is on board with the outcome is also a good sign. All that's left is ... elaborating the substance and implementing the thing. In this post, I try to sort out what problems a standstill might solve, and how these fit with the G-20 statement. Part II offers three ideas on implementation.

Continue reading "Now That Everyone Is on the Standstill Bandwagon ... Where to? Part I" »

ECB + CACs: Fig Leaf Aflutter

posted by Anna Gelpern

Further to Mitu's post about the European Central Bank's bond-buying bellyache, let us linger on the rationale for the 33.33% limit on the central bank's holdings of a euro area sovereign bond series. 

In the middle of the Greek sovereign debt crisis, euro area policy makers agreed to adopt functionally identical collective action clauses (CACs) in member state sovereign bonds, with two amendment options for important financial terms: (1) series-by-series voting or (2) aggregated voting, pooling two or more series. In a series-by series vote, two-thirds of the principal amount outstanding can override opposition by a third. In an aggregated vote, amendment requires at least two-thirds of the total principal amount outstanding in the voting pool plus at least half of each series in the pool.* 

The ECB has taken the position that "in the context of a restructuring subject to CACs, it will always vote against a full or partial waiver of its claims" to comply with the European treaty framework. This means that, if the ECB held more than one-third of a bond series, it would single-handedly block a single-series restructuring. If the ECB held more than half of a series, it could force it to drop out of an aggregated restructuring as well. To avoid being the holdout, the ECB adopted the 33.33% bond purchase limit in 2015 (see Article 5 of this and this excellent piece by Sebastian Grund). Of course, no matter how little sovereign debt it holds, the ECB makes life easier for other holdouts with its pre-commitment to vote against restructuring -- the others need to buy that much less to free ride.

It is unclear whether the 33.33% series limit was motivated by the mere possibility that a government would restructure its debt by written consent* using series-by-series CACs--or a view that this approach was most likely, or even required. Perhaps 33.33% was the the lowest plausible limit, since it is hard to predict how pooling and aggregated voting would work in any given case. Who knows? The only certainty is that in 2015, the ECB voluntarily subjected itself to some oddly-reasoned bond buying caps, and that today, these could knee-cap Italy.

The limit makes even less sense in light of the 2018-2019 commitments by euro area policy makers to adopt so-called "single limb" aggregated stock-wide voting.  Under the latest market standard (due to take effect in the euro area in 2022), a government need not even poll individual series. Now add the likelihood that a country like Italy would restructure using domestic statutes, rather than CACs, as explained in Mitu's post and his article with Ugo Panizza, and 33.33% begins to look mighty random. 

To be sure, it is politically and maybe legally awkward to say that a government would ignore CACs and use domestic law in a restructuring after pushing those clauses as the be-all for years.  It would be more awkward still to say that a government would ignore contracts, statutes, and any other law that might get in its way in an emergency, because aside from peacetime liability management operations, most sovereign debt restructurings could make out a pretty decent case for emergency/necessity rule.

But even if you assume that all euro area sovereign bonds have CACs (they do not) and that they would use them in the unlikely event of a restructuring (they would not), a 33.33% ex ante purchase cap makes little sense. It does not prevent the ECB from helping holdouts, or even from being the main holdout. It does not protect the ECB from losses in the event it is outvoted or suffers a default. It looks like a skimpy formalistic fig leaf covering up for real problems in the underlying treaty framework and short-sighted pre-commitments, at the cost of potentially impeding the ECB's monetary policy efforts at a critical time. The central bank (and the world) would be better off if it were disenfranchised altogether or at least confined to a separate voting pool. Besides, disenfranchisement and confinement are so au courant.

 

*The thresholds are different for votes taken in a meeting (25%+) and by written consent (33.33%+).

Imagine Riding the Ceteris Pari-bus into the Sunset ... in Argentina

posted by Anna Gelpern

Imagine sovereign debt without Argentina -- no Paris Club, no pari passu, no CACs, no SDRM ... even sovereign immunity might look totally different. History teaches that whatever happens in Argentina's imminent bond restructuring (revisiting, reprofiling, rejiggering, revamping --the difference is overblown) is likely to have consequences beyond the long-suffering Republic. The fact that Argentina has an actual government with authority over the economy and some capacity to execute a restructuring (unlike, say, Venezuela) justifies wading into the small print of its bond disclosure--as Mark and Mitu have done. Their able interventions free me to focus on two under-covered points. Methinks that (1) the single-minded focus on voting thresholds is misguided, and that (2) it helps to think of "uniformly applicable" as the latest incarnation of pari passu, which goes to show that inter-creditor equity remains a perennial problem in sovereign debt.

Continue reading "Imagine Riding the Ceteris Pari-bus into the Sunset ... in Argentina" »

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