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Timing is my great tragicomic talent. You may think that when Hamlet puts off taking revenge for the death of his father and falls down a rabbit hole of doubt and isolation, murdering Polonius, spurning Ophelia, and manipulating Gertrude, that is the archetype of an unfortunate chronology but that is because you have not yet heard about my Plan to Save the World and how I ended up pitching it to the British Government in the summer of 2016. When I have set that out, I am confident that you will acknowledge the superior claim of my short history to literary greatness as an iconic account of procrastination with tragic consequences. All the world is here. There is rejection, there is death--well the rejection and death of a pet project, anyway--and there is madness (believe me, I was hopping mad). Dear Reader, what more could you ask?
But, forgive me, I get ahead of myself.
Let's begin at the beginning, in Argentina... Or, perhaps, at the end of the beginning, in the corridors of the IMF.
Or, at the beginning of the end, in Venezuela...
It doesn't matter very much, I suppose. The important thing is that we have a colourful word cloud, don't you agree?
Ta-da!
The beginning is the sad tale of the Argentine debt crisis of 2001, the litigation which followed in the US and subsequent efforts around the world to incorporate collective action clauses (CACs) into sovereign bond issuance.
CACs, which facilitate the coordination of creditors around restructuring proposals in the event of imminent sovereign default, are the pre-nups of sovereign-creditor relationships. In the beginning no one can bear to think they will be needed. 🎵I took those vows (took those vows). I meant 'em back then and I mean 'em right now. 🎵* Some creditors have even been heard to mutter that CACs take all the romance out of lending to governments. But, the sad fact is that a significant number of debt relationships do break down and, in those circumstances, CACs can take the heat out of things and make a period of difficult adjustment easier on everyone, including the kids.
CACs are, however, not a panacea. As the IMF noted, last September, there are a number of persistent challenges facing a contractual solution, including...oh, y'know, stuff like:
legacy bonds;
non-traditional debt formats;
secured creditors singing 🎵I did it my way🎵**; and
the role of sub-sovereign and state-owned entities.
Despite these problems, CACs, which are a solution espoused by one of two well-defined politico-commercial schools of thought, have been in the ascendancy for the best part of a decade. The alternative is usually said to be a proposal for a formal Sovereign Debt Restructuring Mechanism (SDRM) developed around the turn of the century by a team led by IMF deputy managing director, Anne Krueger. It's a well-researched, detailed proposal which, in the end, failed to gain traction because member states had little interest in establishing a supranational architecture--including a new Dispute Resolution Forum--with binding powers *cites a source close to the IMF*.
Bor-ing? Sorry, perils of... my personality.
By the way, DYK that the most electric place on earth is Lake Maracaibo in Venezuela?
Which is where, psychologically speaking, I found myself in 2016. If you remember, Venezuela was in crisis. There were widespread reports of shortages, hyperinflation, starvation and outbreaks of looting. Venezuela was an economy in a death spiral but it was still making its international debt payments according to schedule (the government eventually defaulted in November 2017). And I was busy thinking why that might be so. (There's no easy way to explain why in shorthand but it has to do with an economy dependent on oil, the role of the state-owned producer, Petróleos de Venezuela (PdVSA), the location of one of its most lucrative assets--a 50% stake in CITGO--in Houston, Texas, and the lessons learned from the litigation successes of certain hold-out creditors following the Argentine Debt default.)
Anyway, in early 2016, it seemed to me that what was needed--for both sovereigns like Venezuela and their creditors--was a means of reliably restructuring international sovereign debt ex post facto and what struck me quite forcibly was that the IMF proposal of 2002 was the germ of a good idea which had gotten overblown and convoluted in the way that often happens when large international institutions get hold of a good idea. "Our complex and expensive supranational architecture works brilliantly," they say to themselves, "what this good idea really needs is more of that." The proposal was not, I thought to myself, Occam's razor-compliant.
In fact, what almost anyone at all will tell you is that sovereign bonds almost always come in one of just three legal flavours: Local Law, English Law and New York Law.🍨 The first can be ignored because local law is never an impediment to anything, let alone restructuring. That's why international creditors prefer English or New York (E/NY) Law and will pay higher prices accordingly. This premium is so tempting that sovereigns tend to issue under E/NY Law even though local law could be their brilliant ace in the hole when it comes to enforcement and restructuring. And this truth means that a global regime for court-sanctioned sovereign debt restructuring could be achieved with the passage of just two pieces of legislation--one in London and one in New York. Even better, a court-sanctioned restructuring regime like this would solve most of the problems left untouched by CACs--including by addressing legacy bonds and other forms of sovereign debt, like loans.
(Incidentally, the merits of this idea are sufficiently self-evident that a number of academics and lawyers have independently arrived at the same conclusion, although, in the case of Venezuela, some have also advocated for more direct executive action in the US.)***
Long-short, I started to line up my ducks. I checked in with some peeps who might (or might not) have worked for "an international-standard-setting organisation" and some who might (or might not) have had links to the Paris Club. It all took time. Plus, I had to draft a rudimentary outline of the implementing legislation and, frankly, if it's a choice between spinning barbed wire with my bare hands and legislative drafting, I'll choose the wire, every time. When I was done, there was just time to squeeze in an appointment at HM Treasury ahead of the summer recess. I pitched up in July wearing my best "saving the world, one crazy idea at a time" t-shirt.º
"What do you think?" I asked Senior Civil Servant.
"What.... Do. We. Think?"
At this point, I noticed the heavy dark circles under his eyes, the faint tremor in his hand, the despairing hunch, the oily sheen of unwashed hair...
"BREXIT!"
he ejaculated with the monomaniacal stare of a man who was eating, drinking and breathing it too. "Brexit. That's all anyone has the time to think about."
And that, My Friends, is the unglamorous story of my ill-fated attempt to save the world from the menace of sovereign debt default.
* Songwriters: Brandy Lynn Clark / Trevor Joseph Rosen / Shane L Mc Anally. Better Dig Two lyrics © Downtown Music Publishing Llc, Vista Loma Music, Smacktown Music, Songs Of Parallel, Songs Of Bims, Twelve6 Dogwood, Tempo Investments/smack Hits, Rezsongs
** Songwriters: Claude Francois / Gilles Thibaut / Jacques Revaux / Paul Anka. My Way lyrics © Warner Chappell Music France, Jeune Musique Editions
*** Hear more from Professor Mitu Gulati on Bloomberg Odd Lots Podcast today
º I may, just possibly, have employed a little artistic licence in the retelling of this encounter.
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