Three Sovereign Debt Experts Explain How The World Can Instantly Bring Aid To Emerging Markets

the world are doing worse than others. Yeah, it's really interesting because, of course you have to disentangle the sort of health crisis specifically from the economic crisis. There are parts of the world that may actually be doing better, uh, in a surprising sense in terms of the outbreak of the public health crisis the virus, but obviously not getting spared at all from the fact that so much commerce

is that a virtual, virtual standstill. So even even places that yeah, well the numbers don't seem as bad as the UK or the U S from an economic situation, they may be even worth potentially. Yeah, but you also have some parts of the world where both the health crisis and the financial crisis is pretty bad. And I'm

thinking specifically of emerging markets. So these are countries that don't necessarily have a really developed health system, and they certainly don't have a lot of money necessarily to suddenly direct to containing a pandemic. And now, of course they're dealing with an economic crisis that is making the money that they have even well reducing the amount of money available to them to fight the crisis. So it's really like a double whammy at this point. Right, that's exactly right.

Relatively rich countries or rich countries like the US, for as bad as we may be doing on the public health side, there's no real financial constraint to spending a lot of money, both in terms of helping people pay their bills and also building out a public health system. It's more of a political capacity constraint. But some countries, obviously they simply don't have the fiscal capacity to do what's necessary to really fight the health front, even if

there worthy desire or the political capacity to do so. Right, So, as bad as it gets in the U S, don't forget that the US government can always issue treasuries. And why didn't its deficit for extra fiscal spending, um Sorry that sounded flippant, but I don't intend it to be. That actually is UH an advantage. Okay, well, so today

we're gonna be digging into emerging markets. We're going to talk about some of those fiscal dynamics, but we're especially going to zoom in on this debt question and how emerging markets can actually handle the spending that they need or raise the money that they need in order to fight the coronavirus. Exactly right. So, I mean we've talked about this before, we had a discussion on it. We

talked to brand Setser several weeks ago. That was before some of the I think I'm f meetings, but it's still I think many people still sense that there is much more that needs to be done. And again, because of the nature viruses and also economic collapses, I think time really is of the essence to move before extreme lasting damage takes place. Okay, Well, on that note, let's get straight to it. Then. I'm really happy to say that we have not one, not two, but three guests

on today's episode. Two of them have been with odd thoughts before one is brand new. I'm going to introduce them all. Uh Midto Glate is a professor of law at Duke Universe City and of course one of the world's foremost experts on sovereign debt restructurings. Lee book High is the legendary sovereign debt lawyer, now retired from Cleary Gottlie but an honorary professor at the University of Edinburgh, and Ugo Panizza is Professor of International Economics at the

Graduate Institute in Geneva. All three of them and X are experts in their fields and they've come up with a proposal for how emerging markets might be able to weather this crisis. So thank you all for coming on. Thank you, thank you, thank you. Why don't we uh set out the scene. I guess how much trouble are emerging markets actually in at the moment? Very big trouble, if that's the question. If you one, they can give

you a couple of numbers. So we run some estimates and according to our estimates, emerging markets need to um service that in the next twelve months for nearly nine million dollars. We so this is the public sector and this is the external that of the public sector of

this emerging market country. So this is UH, this is a large amount of money, and there was a not paid by the Prime Minister of Ethiopia in the in the New York Times last week, we basically said that some in Ethiopia and some other discontents, they need to face the choice whether to services that or you know, spent for health care of the their own citizens. So

that's a difficult choice mhm. So already there are countries that have been forced just in these in the short you know, it's really just been a couple of months. Already we're seeing companies forced or started, countries forced to make one priority over the other, either stay good on their external public debt or do the necessary spending to keep the virus in check. Yes, there there have been a hundred countries that have asked the IMF for emergency

financial assistance. That's more than half the membership of the IMF. But that money will not be enough and in for some countries not nearly enough to defray the extra expenses that are coming with this health crisis. Therefore, they're faced with its choice of having to divert funds that had been earmarked for other governmental purposes, including debt service, to divert those funds towards the expenses of dealing with this pandemic.

If I can just add one number. So the the I m F forecast growth for all of one ninety member countries, and at the peak of the global financial crisis, it forecasted growth positive growth for seventy seven countries. This year is forecasting positive growth for nine countries. This is really and even for these nine plants, they are forecasting very low positive growth, which nobody about supercent I'm actually

surprised at nine countries forecast for positive growth. Okay, Lee, you mentioned the number of countries that have approached the I m F for help. We've also had an agreement from the G twenty for a temporary debt stand still I want to bring in mid to maybe you could talk about that and what's involved in that stand still.

You know, there have been some efforts to think about the global implications of the current crisis, and one of the efforts that seemed very positive started with and I MF World Bank Call for Action and was then followed by the G twenty, you know, announcing that there would be a debt moratorium for the rest of the year on debts on payments that are owed to the bilaterals, and importantly in that there was a request that the private creditor sector also provide similar relief, and there had

been indications that they were willing. The Institute of International Finance sort of a lobbying group for the private creditors, had agreed that yes, we should provide relief to the poorest countries in the world altogether, all on comparable terms, and this seemed like a very positive sign that at least we were beginning to think about this providing relief very quickly. Unfortunately, as of today, this seems like it is,

in my skeptical viewpoint, all completely falling apart. All of those enthusiastic statements about providing relief for the rest of the year UH seem to be going nowhere. I think the official sector will provide the relief. I think the private sector is basically trying to delay and not provide any relief whatsoever. I'm sure I hope that they call in and yell at us and say that no, they actually want to provide relief, but I don't see it

going anywhere. Well, Lee, I'm thinking about you know, Tracy, and I talked with you um several months ago at one of our live events and these sort of these debt renegotiations. Even in the simplest terms, if it's just one country trying to renegotiate some of its debt, they seem to you know, these renegotiations can go on for years, with different classes of creditors who own different types of

bonds um all trying to get their share. I can only imagine that it's orders of magnitude more complex when it trying to basically do a solution for every country in the world at the same time. Well, the way we've been thinking about it is that we have an immediate emergency, and that is the need to get funding into the hands of these countries to deal with the pandemic entering. They were a handful of countries who had

already acknowledged that they needed a full scale debt restructuring Argentina, Lebanon, Ecuador, Venezuela. Obviously, we will leave with a much longer list of countries that need a full scale debt restructuring, but that's not the focus right now. The immediate focus in the and and the paper that my colleagues and I produced was intended to find a way quickly and uniformly two free up liberate cash that these countries could use for COVID

nineteen amelioration. This program that me too has described involving the official sector and we hoped the private sector, was all intended to focus on that. Everyone knows that within a relatively short space of time we will have to confront the broader issue that you've just mentioned. How does one deal with full scale debt restructurings, because many countries

will exit the COVID period with unsustainable debt stocks. That will be a challenge, frankly, that we have not faced since the and the Latin American debt crisis and the world it was very different back then. Mh. I want to get to that point, but before we do, perhaps one of you could just walk us through what your proposal actually entails. As you mentioned, you know, maybe it's not that difficult to have a debt stand still for

bilateral sovereign creditors. Not that difficult. Maybe maybe that's sort of overegging it. But there is a sticking point in the form of the private creditors. So what's your solution here? Why don't why don't I walk you through it? It's it's really quite straightforward. We propose that the dead are countries that need this relief, and not all of them will. Some of them will not be afflicted by the epidemic as badly as others, and some may continue to have

or at least have hopes of having market access. But for the rest, we propose that they open what we call a central credit Facility CCF with a multilateral development bank that could be the World Bank, but it could be one of the regional development banks African Development Bank, Asian Development Back, and so forth. The country would then divert the payments that would normally have gone towards interest payments on external debt. It would divert those payments into

the central credit facility. As the amounts arrive at the CCF, the administrator the multilateral Development bank would credit the relevant creditor with a participation interest in the CCF, just like a syndicated loan. The country could then borrow from the CCF to deal with COVID nineteen related expenses. This is a critical feature because the multilateral Development Bank would be

responsible for monitoring the use of that money. No individual commercial creditor or even group of commercial creditors is going to be in a position to undertake that monitoring task. And the last thing anyone wants is money that has been effectively contributed by creditors to deal with this pandemic being siphoned away for other purposes. Put it that way, so the multi ladder of Development Bank would be responsible

for that. The We don't specify what the financial terms of the CCF should be, but common sense is that they should be. That the repayment terms for the CCFP should not put further burden on the post COVID financial position of these countries. In a nutshell, that's the nut Do any of you have an estimate for how much money that could actually free up? Its kind of ends on whether the bilateral creditors are also going to participate in this bugle would have a better idea. I think

of the numbers, the number is the maximum number. It's what I gave you before. If you only focus on payment, you on long term death. The maximum number is what I gave you before. That of course I gave it to you wrong, because I always get confused between millions and billions. I gave you a number of about nine millions, actually nine hundred billions. That's well that's the maximum amount

which is owed by all emerging and developing countries. Clearly, as Lee said, not all countries would need this type of help, So is this sort of an upper bound UH and and the amount varies from from the country to country. But that's sort of let's say, the the end alope, the maximum memberlope. So we haven't, as Lead pointed out, where just this first stage which we need

immediate cash for these countries to fight the health crisis. Obviously, the question of where they will be in terms of dead stock sustainability, that's probably a question for next year,

and that's gonna be infinitely more complex. But in terms of implementing the plan put forth by the three of you to free up this cash through UH sort of international development a bank or multiple banks, who are the actors that need to make this happen, just to coordinate this first step and why is it proving to be so challenging to coordinate them? Initially it seemed like everybody was going to cooperate, the key actors in coordinate such an effort because we do not have anything like an

international sovereign bankruptcy scheme. UH. This all has to be done in a cooperative fashion. And as the historical matter, the key actors have always been the I m F and the multilaterals. Here, the I m F and the World Bank, through their leadership, took early action. I think marchy was when they put out their call to action and the private creditor group initially seemed to support this, which then resulted in the G twenty taking concrete actions.

So end of March early April, it looked like we were going to be able to provide on a global scale relief to basically half the world for the rest of massive relief as Google put the numbers in, and then as the question of implementation, so our team was thinking, you know, everybody's cooperating, this is just a matter of figuring out how do we enable the cooperation. And as we were working on the enabling the co operation, the

willingness to cooperate gradually diminished. Now there are many motivations one can ascribe to this, or maybe this is just the natural process, but uh, you know, as the G twenty said we will provide official sector relief to the poorest countries, then the free rider tendencies blossomed, and I suspect that at least some in the private creditor world said, oh, well, if the official sector will provide all this relief, maybe

we don't need to provide relief. Maybe we need to explain, you know, we didn't really mean we were going to provide relief. We want, you know, proper compensation. Oh. You know, many of these countries actually can borrow it. Market rates are about market rates, and maybe we should just let them borrow. And maybe we have fiduciary obligations, even though many of the people have spoken to don't even understand

what fiduciary obligations are. Uh. So it is looking like the official sector will have to provide the temporary relief. It won't be enough private Uh. Many countries who have access will continue to borrow, even though I think they should not borrow as this stage. If you read their risk disclosures, you would think they should not borrow. And then the debt restructuring when it comes, will come earlier

than it should and will be brutal. I do want to talk about the issuance that we are seeing from emerging markets, but before we do, I understand the free rider point for private creditors, But do you think private creditors might also be worried that by agreeing to agreeing to the stand still, they're basically opening up a Pandora's box of I don't want to say excuses, but extenuating circumstances that countries could use to hit the pause button

on their payments going forward. Is that a concern? It is possibly a concern, But I don't think anyone living through the experience that we're all living through believes that this is anything other than a truly exceptional worldwide phenomenon. None of us, none of us alive today, have ever

seen anything like it. And so while there's always a slippery slope concern in these things, I think the official sector and the private sector could minimize that by ensuring that every time they speak about the relief that they're now providing, they do so in terms that confines it two circumstances of this once in a century variety. I mean,

just to reinforce what at least said. You know, if you post some some policy, you always use the slippery slope argument, right from legalization of marijuana to whatever right you legalize marijuana, and the day after everybody is shooting roine or whatever. I mean, you know, the Bank of England just announced that this this is the worth recession in three hundred years. You know, they postponed the Olympic Games.

I mean, there have been we observe so many, so many exceptions actions that the idea of saying, you know, if you do something now, then you know next year somebody is coming out with some excuse, or this happened, you know in twenty twenty, we're going to do it again. It seems a bit a sign if you don't want to do something or coming up with some some excuse, can I ask you a question? And it's kind of falling on mid to his point, and it's a little

less academic or less theoretical. But for those who have not of us, who have never been in these rooms where the negotiations take place and these discussions about establishing new facilities and debt pauses take place. You mentioned the G twenty. But when you talk about the private sector, the private owners of government debt, how do you mean there's thousands that I don't know how many there are, But how did they coordinate and who who talks for them?

And how do they have a voice in the first place? What did those negotiations sound like well, in this case, a Washington, D c. Based organization, the Institute for International Finance, which has about four hundred and fifty members, most of them are financial institutions. They stepped forward on April nine and wrote a letter to the official sector actors, in effect offering the cooperation of commercial creditors in this stand

still initiative. So, in this case, they have raised their hand and purported to be the mouthpiece for the private sector community in this Now, there are many institutions that do not belong to the i F and might dispute whether they are a legitimate spokesperson. But in this case,

that's that's how it was done. And the G twenty, in its subsequent communicate, and which had announced that bilateral creditors were going to provide a suspension of payments for the balance of this year, actually identified the i F as the coordinator for the commercial creditors. And so you said, initially the private commercial creditors that they're willing to participate in some sort of program, then have gotten cold feed.

How do they couch that? Did they? I? Presumably I presume they don't just say, now you know what we'd like all our money and we want to be paid. First, I presume that they have some sort of higher minded, theoretical sounding argument, But what is there, as you say, it's fallen apart. But how do they how do they

put their complaints with your program? Well, they sent a subsequent letter on me the first which said, we've been consulting our members and we feel we should bring to the attention of the official sector the many obstacles that private sector creditor as will face. First, in their view, the initiative must be wholly voluntary. That is, any creditor

who doesn't want to participate is perfectly free not to participate. Parentheses, That is somewhat inconsistent with another principle that they espouse, which is inter creditor equity one for all and all for one. If everyone can opt out and everyone can

negotiate different terms, you're not going to have inter creditor equity. Uh. Second, they said, in order to do this, individual creditor institutions are going to have to calculate the net present value cost of this deferment and offset it either by raising interest rates or getting official sector guarantees for the deferred amounts. In addition, each institution or some atituitions these certainly the

asset managers will have fiduciary duties. They will have to explain to their investors why they are voluntarily agreeing to defer receipt of interest payments, and that will be a challenge for some of those institutions. So it was a long list. It was not a disavowal of their prior commitment.

It was a preview of the many difficulties that would attend this, and they said that these arrangements must be negotiated creditor by creditor, maybe instrument by instrument, and that process alone could easily eat up the balance of I wanted to go back to the issuance point that Mitto made private creditors basically arguing, well, why don't emerging markets just sell that normally into the market. Somewhat surprisingly, we have seen in a bunch of e M bonds sold recently.

I was just looking at um Sri Lanka's debt and that's trading at distress levels. But there are some cell side analysts that are issuing by recommendations on Sri Lanka, of all things, in the middle of this global crisis. How are these countries still able to issue debt and what are the buyers thinking? At this point? I am completely bit fuddled. Maybe Lee or Ugo can explain this, but I have been watching this truly bizarre phenomenon of countries.

You know, take Guatemala, Paraguay, Mexico, countries that are in very deep distress that if you read there prospectuses explained to the market. Look, we have no remittances coming in, our tourism sector is destroyed. Our primary commodity, say hypothetically oil in Mexico is down in the doll drums. We have shut our borders, we do not have adequate health care facilities, and then they're able to raise billions on

the markets. I am there fuddled. But I do not think that the argument that is being made by some that oh, this is a sign that everything is well and we do not need to provide relief holds. I think that is utterly ludicrous and dangerous for us to um use as a projection for what will come. But you that argument is being made, especially by some who

do not want to provide relief. They are much happier to sell bonds, to buy those bonds at very high interest rates, although I should ex caveat that with the interest rates are not nearly as a high as I would think them to be. But you know, maybe Lee or Hugo has a more sort of rational The markets understand everything at price, every risk perspective. But I am just completely the funneled well that the countervailing factor, I think is the tsunami of quantitative easing that's occurred in

the last two months. You just have a wall of money that centered the market. It must go somewhere. Uh. The interest rates on the bonds of developed countries like the United States or the Europeans are near zero or below zero. So if you're an institutional investor, you must find a home for all of this money someplace, and that perhaps eclipses you a normal risk aversion in assessing some of these investments. I have to say it sounds

me too. And actually both of the both sides of this debate feel very much like the debate around basically every asset class in the world right now, including US equities, in which you look at the fundamental this makes no sense, unemployment expected to shoot. And then the other side of that coin is yes, but there is all this extraordinary

intervention happening one way. It's going to have the resolve, presumably, but the debate about how the E M bond world continues to trade and raise money feels just like a microcosm of literally every other asset class debate we have these days. I was going to flag one of my favorite countries in good times, which is the Maldives, which are very close to my home in Kerala, just a

forty five minutes flight away. And you know normally that that their economics are quite good because they have such a booming tourism sector. But they are completely dependent on tourism. I think it's close to seventy of their GDP comes from tourism or tourism related activities. They have a small portion of their economy that comes from sales of fish uh and they do not have anything resembling a meaningful

health sector. Part of the reason I know a lot about the Maldives is people from the Maldives workers come to India for even the most basic healthcare needs. Now, in the current situation, they are down to zero, no tourists, fish prices gone down to the bottom, They're having multiple COVID nineteen outbreaks, and they can't send their citizens to India because the flights are all closed. Now, this is not temporary. This country is going to find it incredibly

hard to recover even in the medium term. So you know that the estimates from both the official sector and the private markets are much more optimistic in this case than I think reality requires. But I wonder whether it is a window into what's happening in the rest of the world that we are just refusing to face the reality of how bad this is. But I am a pessimist, so hopefully I am wrong. Um, just on that time

horizon point. I mean, this theme tends to come up over and over again whenever people are talking about debt relief or debt stand stills. If you give people a grace period now, um, for instance, in the US, like for certain things they are granting grace periods, does that save up the problem for a later date? And how

do you manage the exit process? How do you make sure that a borrower doesn't end up owing all of the money for the past six months that they should owe and they have to pay it in one big lump sum lump payment. How do you actually manage that? And how do you ensure that you're not saving up

a problem for the for a later date. Tracy is concern the G twenty, when they announced the bilateral debt suspension, proposed that they deferred interest and in their case, principal payments would be due over a four year period with one year of grace, so one year in which no principle is repaid, and then another three years. That was

their proposal for how to smooth out this problem. The thinking on this is that at the moment it is simply not possible for anyone to prepare a debt sustainability analysis for any of these countries, that is, in which one can repose confidence. Put it that way, there are simply too many variables. When does this crisis end? What will commodity prices look like when it ends, What will export markets look like, What will the tourism industry look like?

What will the financial markets look like? Those are shrieking unknowns at this point in time. Hopefully by the end of this year some of those issues will begin to be able to be analyzed, and that would allow the I m F to begin to assess longer term debt sustainability. As I said, a moment ago, we should not expect to leave with only four or five countries facing the need for a full scale debt restructuring. I think there'll

be many more. But who's on the list and how severe is that debt restructuring at the moment, no one I think can predict. So, just on that note, if we're looking forward and we think that the world and emerging markets especially are going to come out of the current crisis owing more money, if we think that we're going to get a bunch of restructurings, it's just a question of how many and who's first, and who sort

of needs it most. Is that maybe is that an opportunity perhaps to rethink the way emerging markets are funded or just sort of hit reset on the way this whole system um actually works. I'm trying to end on a sort of optimistic note, But do you see an opportunity? You stole my question, literally the question I was going to ask. No, no, no no, it's perfect, it's great, this could be the last that's uh. You You and I were in the exact had the exact same thought at

the same time. So my mouth, my mouth, Yeah, whogo is our optimists? Let's lett him in I don't know. I mean, I've been pushing for a long time towards this idea of using more contingent that instruments, and so far they haven't worked. We can tell you of many cases in which countries have paid dearly to try to use, you know, issue GDP index bonds in the sense that they that price when things were going well, without getting anything when things were going badly. So if we could

go in that direction, that would be great. Even though I'm the optimistic guy, I'm not very optimistic, but I don't know what Lee put that on this well. The current effort by some in the official community is to try to figure out a way in which we can deal with multiple sovereign debt restructurings going on simultaneously. We did that in the eighties, but of course the creditor universe was a much more hum a genious group of

commercial banks. Arguably we did it starting in with the Brady initiative, and that's what some in the official sector are looking at. Is it possible to replicate a template for how a sovereign debt restructuring could be done so that if we are faced with the situation in which there are ten or twenty or thirty countries going through

the process at the same time. They would not have to each individually and in the spoke manner attempt to figure out how to implement a dead restructuring that's right now the subject of investigation by some of the official sect. Okay, well, on that sort of optimistic note, but not necessarily. We're going to leave it there, Ugo, mit too, and we thank you so much for being on and for that fascinating conversation. Thanks very much, good to be with you.

Thank you, thank you. Yeah, that was great, appreciate it. Thank you so, Joe. I found that conversation fascinating, as I mentioned, and I know you're fond of saying that people don't necessarily need to worry about debt. In fact, I can see you tweeting that just a few hours ago. But that really only applies, I think to some developed markets, right, and e M, you can and probably should worry about

the debt. Yes, I think there is a very different conversation when you think about debt sustainability and the cost of borrowing and all these countries in the e M versus the developed market context, and what this conversation really drives home is that you know, it's so complicated to just get in the short term debt relief or sort of that, when, as a lead pointed out, when it actually gets to the point about looking at sustainability of the overall debt stock, it really does decided just going

to be mind bogglingly difficult challenge for the world in the years ahead, even if the virus itself fades. Is a problem. Yeah, I mean, the complexity, you're right, is what really stands out. You have all these different creditors, all these different claims, you have public, private, foreign um and domestic creditors. I don't even know how how you would begin, but you know, kudos to the three of

those guys. They're trying to put this together. Yeah. No, in terms of the immediate need, like I think there's an agreement the immediate need everywhere is cash, right, Like it's the cash isn't going to solve the health crisis, but cash can keep people solving, keep people paying their bills, keep paying doctors and so forth. And so there does seem to be this recognition that we don't need to make the first part of this too complex. We just need to free up cash, and that's even true in

the U S. Contact. Yeah, and I guess it would be interesting to see if um the urgency of this particular crisis makes people realize that they do need to create some sort of template or sovereign restructurings going forward, because that's been I mean, we've had so many episodes on sovereign debt restructurings because each one of the tends to be unique in its complexity and in its particular issues. Yeah, you know what I was thinking about too, like a

little bit. You know, obviously this was a sovereign debt context, but I also think about some of our conversations we've had with Chris White of private sector debt, and the consistent theme is that when you start talking about the asset class of debt, it's just infinitely more complex than any other asset classes because of how many different versions are. I mean, you think about like there's one Microsoft stock right MSFT you want to look at like debt or

I don't know Microsoft has debt. I know, I'm sure they do, but it's get it gets infinitely more complex right away, and the number of in the difficulty of trading that and coordinating that and so then you think about this on an international level, all the different things that make public sector that way more complex, and it just yeah, it's mind boggling. And that's why there have been certain stories, like say Argentina that have been in the news for like twenty years, because and that's just

one one, one country. Yeah, and it's the same story pretty much over and over and over all. Right, Um, should we leave it there? You know what, I just want to say one other things I love I mean, I didn't love it, but mid twos comment about you know, he's pessimistic, but he'd like to be proven wrong. I feel like the amount of times I've said some version of that over the last few months, I'd like to

be shown that I'm wrong. There's a really sort just because there's so many sort of bleak ways that this could all go extremely bad. Well, I think if you're a bear right now and you're going and I hope I'm right, that would probably be a not very popular position to be taking taste Taste Well. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and

I'm Joe wisn'tal. You could follow me on Twitter at The Stalwart, and you should follow our producer on Twitter, Laura Carlson at Laura M Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, as well as all of the Bloomberg podcasts under the handle at podcasts. Thanks for listening to