Atlantic Council

Reforming the Future: Lessons from Sovereign Debt Restructuring

Introductory Remarks:
Andrea Montanino,
Director, Global Business and Economics
Atlantic Council

Sam Fleming,
U.S. Economics Editor,
Financial Times

Joseph E. Stiglitz,
Columbia University;
Nobel Prize Winner

Sean Hagan,
General Counsel, Director of the Legal Department,
International Monetary Fund

Cecilia Nahón,
Ambassador of Argentina to the United States

Maarten Petermann,
Managing Director and Head of the Special Situations Group for Europe, Middle East and Africa,
JPMorgan Chase and Co.
Location: Atlantic Council, Washington, D.C.

Time: 12:30 a.m. EDT
Date: Tuesday, May 12, 2015

Transcript By
Superior Transcriptions LLC

ANDREA MONTANINO: Welcome. Welcome, everyone. Can you take your seat? I hope there are seats for everybody.

I’m Andrea Montanino. I’m the director of the global business and economics program here at the Atlantic Council. And I’m delighted to see that so many of you could join us today. Along with Peter Schechter, which is the director of the Adrienne Arsht Latin American Center, I’m very pleased to be able to host this discussion with our distinguished panelists.

Today’s event is titled, “Reforming the Future: Lessons from Sovereign Debt Restructuring,” because Peter and I recognize that the event in the news today and yesterday in Europe, Latin America and elsewhere stem from both the short-term, contingent reasons as well as longer term ones.

On the short term, everybody knows that today is the day of the repayment by the Greek government to the International Monetary Fund. And there is approximately 7 billion euros of government bonds to be reimbursed by July and August, and 27 billion, if I’m not wrong, to the IMF in July and July. So the question on the minds of many is whether we will see another Greek default and what potential consequences this could have on the stability of the international financial markets, the euro and Europe.

But Greece is not the only country in the news. Ukraine is currently negotiating its debt restructuring as a key component of the completion of the IMF review of their new program. A failure to get an agreement with creditors could put the program off track, given the (hard list ?) for the Ukrainian government’s path to reform. And of course, Argentina – Argentina and the long, difficult legal situation with its creditors has been a headline for many months.

So it is clear that sovereign debt issues are important today, but they will be even more important tomorrow. And we want to really look at the future, rather than just at the past. Economies around the world, many with historical peaks of public debt, are more connected than ever through trade and financial investment at the same time that the world is becoming more diffuse, destabilized, fragmented. So all these issues contribute to increase instability, where the Fed goes beyond individual countries and touches the role of international organization, like the IMF.

It is also quite clear that sovereign debt issues influence and frame global and regional politics. This is not only true in Europe, but take Latin America, where almost 600 million people are moving to the middle class and already in the middle class citizens. So I’d like to say a couple of things about today’s discussion.

First, it would be the first of many others on these issues. Me and Peter and the Atlantic Council are convinced – and by the turnout today it seems that you are too convinced – that this is a major global issue, without black and white answers. We at the council will try to shine a light on the different views of the problem.

Second, we are very grateful for our experienced panel of speakers. It is a uniquely diverse panel as well, and probably for the first time we have on the same stage a debtor country, the IMF, and a leading private financial institution together. Unfortunately, there was a last-minute change in the constellation of our panel, and Mr. Pablo Lopez, secretary of finance of the Republic of Argentina, won’t be able to join us here today. But we are happy that the Argentinean government will be represented by Ambassador Nahon.

Third, today’s session is not all about Argentina or Greece or Ukraine. It is about sovereign debt and future challenges for its restructuring. It looks at the past to find new venues for the future. We really want to look at the architecture of sovereign debt restructuring, rather than looking at specific countries. So this is also about Mexico 1994, Russia 1998, Pakistan 1999, Iraq 2004, and many other countries throughout the world.

So with that, allow me to introduce our distinguished panel.

Joe Stiglitz, university professor at Columbia and Nobel Prize winner in economics. He has been a tireless advocate in the public sphere as well, advising policymakers and governments for many years. And his most recent new book – I do some advertisement – “The Great Divide: Unequal Societies and What We Can Do About Them” is already a bestseller, but we can continue to buy, of course.

Sean Hagan – Sean Hagan is a friend and the general counsel and director of the Legal Department of the International Monetary Fund. He led the recent IMF effort on suggesting proposals for the future debt restructuring and he’s a leading world expert on prevention and resolution of financial crisis, with a particular emphasis on insolvency and the restructuring of debt, including sovereign debt.

Cecilia Nahon is the ambassador of Argentina to the United States. Previously she served as secretary of international economic relations, as well as serving as Argentina’s sherpa to the G-20. She was also undersecretary of investment development at the Ministry of Foreign Affairs of Argentina.

Maarten Petermann is the managing director and head of the special situations group for Europe, Middle East and Africa at JP Morgan Chase. He had a key role in many negotiation in the Greek debt restructuring and joins us from London today.

With that being said, I will hand over to Sam Fleming, who will be the moderator of today’s discussion. Sam is the U.S. economics editor for the Financial Times, covering U.S. economics, financial markets and business, as well as the Federal Reserve and the U.S. Treasury. So please join the stage. (Applause.)

SAM FLEMING: Well, thanks very much indeed, Andrea, for the kind introduction. And thank you, everyone, for coming along to listen to this fascinating panel and fascinating topic.

Back in the 19th century, people used to send gunboats to enforce sovereign debt crises. Today they are more likely to send lawyers and district court judges. But the process hasn’t changed in one way, and that is that it tends to be extremely messy and incredibly contentious. And so one of the key agenda items we want to talk about today is the idea of whether there could be ways of making the sovereign debt restructuring process a more orderly one, especially in the context of rising public sector debt-to-GDP ratios around the world.

I’m going to start my far left with Professor Stiglitz. Joe, thanks very much for joining us. Can I get a little bit of background as to why you have quite publicly backed the idea of a U.N.-backed idea of a treaty mechanism for sovereign debt restructuring?

JOSEPH STIGLITZ: Well, first, let me say a few words about why the issue is so much on the fore, besides the fact that so many countries are about to go bankrupt. (Laughter.) The basic thing is that no country could really have a debt market without a bankruptcy law. I mean, back in ’97, ’98, when I was at the World Bank, the World Bank and the IMF were telling countries all over the work that they all ought to have a bankruptcy law.

We don’t have international bankruptcy law. We don’t have a rule of law for dealing with the question of what happens when a country owes more money than it can pay. And that can – situation can arise not because of any malevolence, you know, any bad behavior. You know, just when you borrow, as one of our defense secretaries said, stuff happens. And sometimes those things are negative and you wind up more in debt than you repay. So the question is, what happens?

As you said, historically we had an easy way of settling it. You send in gunboats. And that settled the issue, but it wasn’t really – it’s not really a 21st century way of doing things. So what has made things – let me just point – three things have made things much worse in recent years.

The first is that we’ve moved from bank markets – banks as lenders to market security – you know, bonds. Back in the Latin American crisis in 1980, you can put a few people in a room, hammer it out, and with a little bit of twisting by a few governments of the arms of some of the banks, and they went along. Today, you couldn’t have a room big enough for all the creditors. So that’s one change.

The second change is one that’s not fully appreciated, is the growth of CDSs. And CDSs are important because the people at the table, the bond holders, may have no economic interest in the outcome. They may have an adverse – they may have an interest actually not having a settlement because they may get paid more – they may do better without a settlement than they do with a settlement.

And we saw that sort of in the Greek issue, nobody knew what was going to happen in the first restructuring and it got so perverse that the ECB, the European Central Bank, preferred that the restructuring be a mild one in which the CDSs didn’t pay off rather than a deep one where they did pay off because they didn’t know what was going to happen. So the CDS just is a big change.

And the third really big thing, and the reason this is so much on the table is a District Court Judge Griesa made a very – what I think is a very peculiar decision. I’m not a lawyer, but I’m an economist. And in terms of what the law ought to be, not what the law is, but the law ought to be, it was very peculiar. And basically, his decision made it almost impossible to get a fresh start, almost impossible to restructure debt. And so we have a real problem.

And a resolution was introduced into the U.N. to try to create what I would call an international rule of law in this area to start a process of discussion. And it’s gotten almost unanimous support from emerging markets in developing countries and, perhaps not surprisingly, opposition from the United States.

Just to give you a background a little bit – just one more second – on Judge Griesa’s decision, it went all the way to the Supreme Court, appeals were filed by other countries that were not necessarily friends of Argentina, but they were – they really thought it was important to have international rule of law that worked.

Even many people – they were filing from, I think, at the American Bankers Association and – I mean, because his decision really undermines America’s financial markets. So it was a suit where some people in American financial markets gained, but the vast majority were losing. So it was a really peculiar suit.

MR. FLEMING: Sean, we’ve been here before in terms of the idea of a global sovereign debt restructuring mechanism. In fact, the IMF proposed one about 14 years ago. It didn’t happen because of the opposition of one prominent country, the U.S. That opposition is present today, again, in terms of the U.N. process. Is there an alternative?

SEAN HAGAN: OK, so it is interesting that the discussion of the architecture on sovereign debt seems to come in waves, and not surprisingly follows major debt restructurings, like in Greece. And it is true that about 14 years ago we – in fact, following the Argentine restructuring, there was a major international debate about the issues that Joe has raised, which was do we need to have a more structured, orderly framework for restructuring debt?

And the fund took this debate seriously and proposed a statutory framework that was very loosely based on Chapter 11, but essentially was a framework that involved an amendment to the IMF’s articles that would enable a majority of creditors to make decisions that are binding on all creditors. As was indicated, it was a proposal that was discussed extensively, but in the end it wasn’t just the United States, but a number of the emerging markets did not support it as well, because of their concern that it would increase the cost of credit.

That didn’t stop work on this issue. And what we did is we ended up looking at alternative legal frameworks to achieve the same objective, which is to bind all creditors to an agreement reached by majority, OK? And we worked on that with the market and their call to collective action clauses. So you replicate the legal framework from a statute into a contract. And of course, it only applies in future contracts.

But there are limitations to that approach, which were in some respects in play during the Greek restructuring, which was that these clauses only bind the holders of a particular instrument. So holdouts can essentially block the operation of these provisions by obtaining a holdout position, and then essentially you can have a situation where you don’t actually have, you know, 100 percent participation.

So one of the initiatives that we’ve been undertaking, again in consultation closely with the market, is to come up with clauses that aggregate the voting across all instruments. And we’ve had an extensive outreach on this issue. We’ve agreed with the international capital markets association on a set of provisions which actually now have been introduced into bonds governed by both English law and by New York law.

Now, is this a panacea? No. Why? Because it doesn’t apply to the existing stock. And there is a significant existing stock – approximately 900 billion worth – governed by New York and English law. So you know, public policy often is more incremental than we would like. But I think it is an important step forward.

I would emphasize, Sam, that the whole issue of addressing collective action problems is an important issue, but from our perspective it’s only one issue. There is a – you could look at the collective action issue as being the problem that you need to address at the end of the process, when you’ve reached an agreement and you need to bind in everybody.

From our perspective, a critical problem is the beginning of the process, which is that we think that debt restructurings should not be the norm. They should be exceptional. But when they are necessary, they should happen rapidly. They should happy early because delay actually is bad for the debtor, it’s bad for the creditors and it’s bad for the system.

And our concern is that we do not have an effective trigger as you would like. And we’re engaged in intensive discussion within the fund about how to, you know, make a trigger more effective. And we can talk about that, but I’ll let the others go first.

MR. FLEMING: We can – absolutely. Let’s talk a little bit about the idea that debt restructuring’s under the trigger and, certainly under the U.N. process, potentially could happen more often. Is that – Maarten, is that something that you, as a market practitioner, worry about, that – the thrust in terms of the IMF and the U.N. seems to be that perhaps countries need to be given the opportunity to get out of their problems more readily?

MAARTEN PETERMANN: Well, a couple of things. Yes, debt restructurings are messy. And in my view, they will always be messy. It’s like a divorce. You know, you can make the nicest framework around it, but it’s still going to be messy because there are a lot of people involved, I think there are a lot of lawyers involved, which complicate matters. So from that perspective, I don’t think you’re going to have a perfect framework which is going to solve a very imperfect situation that you’re going to be dealing with. So that’s one.

And I think that’s – from my perspective and from a practitioner perspective, we don’t always have the opportunity to comment on the framework like we have, actually, you know, today. So my background is, you know, I go into a situation, I have a framework, and the bank asks me basically to make the most of it. And then afterwards, I can have opinions about it and what could be better and all that kind of stuff, but I typically find myself then in another situation. And actually this is probably one of the first times where I’ve personally reflected on all the restructurings I’ve done and what could actually be done better.

And the thing what questioned me to the point, in terms of having a national bankruptcy court, and from the one perspective of the markets – you know, if I ignore that aspect – but I find it puzzling that a sovereign at that point in time, which is so critical, would give up so much sovereignty to bind themselves to an agreement which is not basically supported necessarily by the voters. It might be a more objective agreement and a more clear agreement. But at that point in time – and it’s a little bit what you see in Greece – at its darkest hour you actually want to have your most sovereignty to basically do what’s best for your country.

And if you introduce this bankruptcy court, and assuming that everybody’s going to hold themselves to it because to a certain extent we have rules and if everybody applies rules and follow the rules, you know, you end up in a situation where the situation will be resolved. But I find that, you know, irrespective of the market perspective and just looking at it from an outsider, if I would be in government, that is exactly the moment I want to be in control of my destiny and not hand over my destiny to three or four people who might not even have set foot in my country, don’t understand the country’s dynamics, the people, the mentality, the origination of the problems and will just look at a blind set of documents and go into an interpretation and then try and think about what is the best outcome here.

I mean, you take away, you know, the influence you have in structuring your future. You might be told as a sovereign, you’re going to exchange and it’s going to look like this. This is the haircut that you’re going to give and this is what everybody is going to accept. And it might well be that, you know, as a sovereign you actually want to do more than that, or you think that you need to do more and your population expects you to do more.

So if I look at it from the perspective of the market participants, is this is something that the market is waiting for? I don’t think – I don’t think it is. I think – you know, and to Mr. Stiglitz’ point, you know, we don’t have bankruptcy laws, why? Because to a certain extent the fundamental issue is a country can’t go bankruptcy. And we have bankruptcy laws because we have – in normal corporate debt restructurings we have very specific rules because there’s enforcement and all these kind of things. You have fiduciary duties and all these kind of things. And people who buy sovereign debt, you know, effective – and I read in one of the papers, it’s effectively a promissory note. There’s no attachments. There is no nothing.

So from that perspective, I don’t think from the market’s perspective this is something we would want, but I question very much why a sovereign would want it either.

MR. FLEMING: Ambassador, let me ask you, first of all, your view on that sovereign architecture. I suspect you’re in favor – I know you are in favor. Let me put the case for the prosecution on this. Since 1970, about 70 countries have restructured their debt, doesn’t seem to be particularly difficult. Argentina has obviously been impeded by these holdouts. But actually isn’t there a case that actually, for many countries, it’s too easy to restructure and creditors’ rights need to be asserted more readily?

AMBASSADOR CECILIA NAHON: Well, I think that if you take a look to the history of sovereign debt restructurings, as you were doing for the last 30 years, there has been a succession of events that have been eroding sovereign immunity and that in fact have been creating the grounds for vulture funds behavior and for really attacking countries in their sovereign debt restructurings.

This chain of events was certainly transformed last year with Judge Griesa’s ruling. I believe that’s been before and after the Argentine debt case. And that’s because countries all around the world and international institutions and also market participants have become conscious of the damage that holdout behavior can create to sovereign debt restructurings.

And this isn’t just an issue about Argentina. In fact, the fact that there’s now going on a global discussion and international process of reform related to changing sovereign debt restructurings clearly shows that this is an issue of concern for all countries around the world. It’s not only the IMF. It’s not only the United Nations. But the G-20 leaders have stated very clearly that predatory behavior is an issue of concern and that reforms and actions need to be taken.

So we’re talking about a global problem and we certainly believe there needs to be a global solution. Of course, all the actions that could be taken, and that (Sean ?) was presenting, in relation to making what I called vulture-proof clauses and vulture-proof contracts we believe are positive. Whatever you can do to assure that all the creditors respect the deal that you arrive with the majority of creditors, that’s very important.

That’s exactly what Argentina did. In fact, we reached an agreement with 92.4 percent of our creditors. But a small minority of around 1 percent decided to hold out, to not accept this deal and to in fact try to sabotage the restructuring for the whole. So I think that we have a problem here, that it’s also an issue of concern for the markets, because in the case of Argentina what you see is that holdout behavior, vulture funds, don’t only act against sovereigns, they act against good faith and the majority of creditors.

Now we have a situation in which Argentina’s creditors are not being able to collect the money that Argentina paid. They are not receiving their money because there’s a blockage in the collection of payments that we decided by the judge. So this is unrelated funds totally to the litigation, that have nothing to do with our case, and that in fact are not getting their money – including U.S. bond holders, including U.S. pension funds, including U.S. banks that are also being damaged because of the situation. So I think it’s not only of interest of sovereigns, it’s certainly also an interest for the market participants as well.

MR. FLEMING: Maarten, do you recognize that characterization?

MR. PETERMANN: I think – you know, and that’s one of the things which, when I was going through some of the literature in preparation for this, I found a little bit astonishing, is that the concept of the holdout is not something which is limited to debt markets. It’s limited to equity markets. It’s limited – it’s basically politics. You could argue that, you know, at the highest level at the United Nations sometimes you have a holdout problem when you have a vote. So from that perspective, it is a universal thing.

And what I – what I was surprised about is that nobody actually did, at least in the articles that I read, a comparative study and basically say: How do equity markets deal with holdouts because, you know, I have the benefit that I’ve worked in equity markets, I’ve worked in credit markets. And you know, we have issues when we do big takeovers of companies. You’re going to potentially have a holdout issue. And there is – there are quite a lot of rules and market mechanisms in equity markets which effectively help deal with this issue which, you know, you could see whether they could be applicable to the debt markets.

And for instance, if you look at how national governments manage the capital structure and the shareholder structure of some of their key industries, where if I want to buy more than 10 percent in a Polish insurance company, I effectively have to go to a regulator to ask for approval. And the regulator will vet is this a good, you know, firm? Does he have honest intention? Is it well-capitalized, et cetera, et cetera. And guess what? They can say no.

And, you know, if I look at that – and I’m not an economist. I’m also not a lawyer. So from that perspective, I’m very much a practitioner looking for practical solutions to problems. And you argue – it’s like, why wouldn’t you apply similar mechanism to sovereign debt? You know, if people worry about concentrations of debts in the hands of people who they don’t think they would welcome, you know, being a debt-holder in the country, then introduce similar kind of statutes and say you have to go through the central bank or a regulator saying if you want to own more than 25 percent of Ukraine debt, you know, ask for approval. And from that perspective, you can use these mechanisms to smoothen out, you know, the holdout problem, as we do in equity markets.

MR. FLEMING: Joe, the – I mean, the argument the holdouts would make is that they are a necessary part of discipline on sovereigns. And if they weren’t there, then sovereigns could behave irresponsibly.

MR. STIGLITZ: That’s absurd. You know, countries repeatedly have to go to the market. And the discipline is that if you don’t behave well, you won’t be able to get access to the market again. They may decide they don’t want to access the market again. But I’m going to come back to two points that were raised earlier. One of them is you said, you know, things have worked out pretty well. But as Sean pointed out, you know, they haven’t really worked out. It depends on what you mean, “worked out.” There are two ways in which they haven’t worked out.

One of them is that the restructuring – and I want to emphasize, we use the word bankruptcy, but that’s a metaphor. Really we’re talking about restructuring. So the notion that there can’t be bankruptcy is not the issue. It’s the restructuring of debt. But they typically wait too long and aren’t deep enough. Not only do they wait too long, but they’re not deep enough. And we have so many cases where they go into debt restructuring, three years later they’re into another restructuring. The economy’s devastated in the interim. And it’s clearly not successful.

The other question is, what do you mean by success? You know, if you have a big guy that beats up on another guy and succeeds and the other guy says, well, you know – you say, well, it worked out OK, the big guy says that. The little guy may not feel that. We had laws about slavery that it used to be we had slavery. People would run away and they’d get returned. And actually, there were discussions about these laws back before the end of slavery. And the slave owners said, these laws actually are very good. They are part of private property. Slaves were property. And they worked.

So in my mind, the real question is a question of equity, a question of how the market works as a whole. And the answer to that is the current market isn’t working very well. Now, part of the issue that – pointed out, issues of restructuring that happen in private market, as you said, you know, equity, but there are negotiations. And those negotiations go on with the backdrop of a legal structure. And if they can’t reach an arrangement then you go to a judge and he makes a judgment about equity. What is the fairness? Is it 1 percent holding out? Is there justification for their holding out? Or is it the 99 percent are exploiting that 1 percent? So there’s a framework of judging equity.

Now, I want to also pick up a point that was raised: Would countries agree to give up sovereignty, you know, particularly at that critical time? And to me, as I’ve thought about this issue and, you know, discussions have gone on, I think maybe the appropriate way of going forward – and there’s some discussion in the U.N. context – that is the essential issue that we should make sure that no contract gives the right of one country – one government to give up sovereign immunity because they’re giving it up for future governments.

So when you borrow – you know, you can’t sell yourself into slavery. That’s a basic law. And so the same thing – one government can’t buy its future governments to say we are giving up our sovereignty. That would imply that the nature of the – what we really are trying to get to is what I sometimes call a soft law framework, a framework where you would have mediators, you would try to set up norms, that the country in the end reserves the sovereign immunity. But if you don’t go along with the norms that have been established, you will have consequences about your ability to get money in the future.

But they’re – what we need to do is to try to establish what those norms are. And the norms are just because you’re a big guy, you can’t beat up on a little guy. They’re more based on principles of equity that we – you know, that the international community should work at.

I want to just make one more little point, which is I chaired an international commission in the aftermath of the – of the crisis that had central bank governors and, you know, experts from all over the world. And we focused on a lot of issues, but this was one issue that we said the international community had to address. It was before Judge Griesa’s decision, but it was really picking up on the efforts of the IMF. I thought – we thought their initial efforts to try to develop some restructuring mechanism were right and that the international community really needed to move in that direction.

MR. FLEMING: Sean, can I ask a little bit about the proposals then that the IMF has come forward with, which clearly short of what was put forward in the early 2000s, but still significant given this is a change to the way the IMF handles its lending programs and the IMF is always going to be involved when a country gets into serious financial trouble. Can I – can I get a little bit, first of all, in terms of how this would change things and how significant these reforms would be?

MR. HAGAN: Sure. So, I mean, just to pick up, you know, on what we perceive the problem is that we’re trying to fix, OK, because it’s important that we identify what the problem is. So from the fund’s perspective, you know, countries come to us generally when they’ve lost market access, when essentially they’ve got large amounts of debt that they can’t refinance with future borrowing. And they’ve lost market access because the private sector itself has made a judgment that they’re nervous that they’re not going to be repaying their debt. So that’s when they come to us.

And clearly, they’re looking for fund financial assistance to enable them to repay their debt. And for the fund, our job is to basically resolve the country’s underlying problems. That’s the basis of what you all know is conditionality, not to enable them to delay the resolution, but to actually take necessary steps to address these problems. And in many cases, the – well, the ideal situation is where we put together, with the authorities, a program – an economic reform program that, with our financing, actually catalyzes a return to market access. And they – all creditors get repaid on the original terms, it’s called – what we call the catalytic approach. And it’s worked in many cases – Brazil, Mexico.

But there comes a time when the fund looks at a country’s debt stock and realizes that it’s so large that no matter how much financing the IMF provides, no matter how much adjustment the country engages in, it will never be able to service these claims. It’s effectively not illiquid, it’s insolvent. Now, the problem is making the judgment as to whether a country is illiquid or insolvent. In the corporate context, it’s relatively straightforward. A company is insolvent if its value of the liabilities exceed its assets. In a sovereign it’s more complicated than that because the assets are a – you know, theoretically inexhaustible because of the taxing power.

So you have to make a judgment, at what point does adjustment actually become counterproductive because it actually undermines the growth, therefore the tax base? There’s also the political constraints on adjustment. But wherever that moment comes, where – and it will always be a judgment, by the way. The judgment is that the fund cannot provide support in the absence of a restructuring because to delay a restructuring at that point, we’re not helping the country. We’re actually making it worse because the country is expanding the debt that it’s going to have to restructure anyway. And for creditors, creditors are only becoming more diluted.

So in those circumstances, it’s in everyone’s interest to do a restructuring. So for the fund, from our perspective, what’s central is that we look at a modification of our lending framework that enables us in those – in those cases, and they are exceptional, where a debt restructuring is necessary, for us to basically initiate that earlier. Now, one of the specific issues that we’re trying to address – and it’s a very – it’s one that essentially came up in the context of Greece – is that where there’s a sense that the debt is unsustainable – that’s the word we use, that essentially it cannot be repaid – should we delay a debt restructuring because of concerns about contagion?

And that’s, of course, what one of the concerns was in 2010. And I think fund staff, in any event, have reached the judgment that delaying a restructuring because of concerns on contagion is not only ineffective, it’s actually counterproductive because, in our view, first of all, you’re not helping the country, you’re actually making the country situation worse. But secondly, you’re not really addressing contagion because our view is that contagion is generated by uncertainty. If the market feels that even with this bailout the debt is still unsustainable, you haven’t really addressed contagion.

And so therefore, our view is that this idea of create an exception where we delay a debt restructuring for a – because of – we should basically step away from that and we should eliminate what’s called the systemic exemption.

MR. STIGLITZ: Can I just say – I mean, Sean is exactly right. And there’s one more dimension to this. There is a major inter-creditor equity issue, because when you delay it, the short-term creditors get out and other people are left holding the bag – often the international creditors, often other long-term creditors. So it is both – I mean, he’s absolutely right about the contagion, about the fact that you haven’t solved the problem, you get it worse. And it’s also true that there are real equity issues.

MR. FLEMING: And this is born, obviously, of the Greek example, not wanting to repeat that example. I suppose the worry that some people express is that, in a sense, early restructuring could create more restructurings and more systemic concerns about the solvency of a particular country. The moment it seems likely that they might have to approach the IMF, creditors will start to panic and that could be a self-fulfilling prophecy, almost.

MR. HAGAN: OK, so this is a really important issue, which is – remember that we’re not – again, and I – you know, we – whenever you have a conference about restructurings, you generate the feeling that this is the norm. I keep want to emphasize, it’s the exception. The fund still feels it’s critical that we maintain the – what we would consider the normal approach of providing financing to countries that have lost market access without a debt restructuring, right?

So that the fact that a country has lost market access and comes to the fund, this change would not necessarily mean that there’s going to be more restructurings. We would still have the possibility of essentially providing large amounts of financing without a restructuring. What we want to do is have the flexibility in those cases where we do have concerns about sustainability to basically initiate the process. So there would be no automaticity.

And if a country has already lost market access, Sam, at that point, there’s not going to be really a run from the country. They’ve already lost market access. We’re not talking about this in circumstances where countries have market access.

MR. FLEMING: Ambassador, how would that system have affected Argentina back in 2001?

AMB. NAHON: Well, Argentina was certainly one of the cases during the 1990s of rolling over debt once, and once again getting bigger access to the market and really getting to a very unsustainable debt. In 2002, our debt-to-GDP ratio was 166 percent. The debt at the time of Argentina was unpayable. Argentina, as you know, was the poster child of (neoliberal ?) policies during the 1990s. And to sustain the convertibility regime, more foreign debt was acquired. We were very close to the IMF at that time, as you know, and to the Washington consensus policies. We had a very serious back crisis – social, political, in economic terms.

And since 2003, we restructured our debt with a new president and with a new concept, that I think is really a lesson that we can share with everybody – and maybe with the Greeks as well – that for growing and for paying – for being able to pay your debts, you need to grow. And to be able to grow, you need to have a sustainable debt. So we had a haircut. We’ve been paying our debts. And now we have a manageable debt that we can pay and that we in fact have been paying since 2005.

So I think that the concept that debt sustainability is key for growth is very important, but also growth is very important for being able to pay your debts. If you don’t grow, there’s no way you can get the resources to pay your debt. In our case, probably a haircut before and a restructuring before would have been good. But we finally had the restructuring. In fact, 92 percent joined.

And the thing that this shows is that payment capacity is very important, and inter-creditor equity, as was saying Professor Stiglitz, is also very important. In the Greek case, you can also see that the holdouts problem has been present and that the vulture funds have been present there. So I think that it’s not only Argentina, a lot of countries that really show that we need a state to have a solution for these, because it’s a global issue.

And just one minute going back to the issue of the international reform, I just say that in as much as we agree that vulture-proof clauses are a move forward and we really need to support that work, it’s very important to know that there are no fully vulture—proof clauses, and that in fact judges all around the world can change their views, can interpret clauses in a very unwarranted way, in a very extravagant way, as Judge Griesa did.

Maybe you know the story of Argentina’s asking in 2004 – the very same judge, Judge Griesa. Argentina before the debt restructuring asked to make a declaratory judgment to Judge Griesa on the interpretation of the pari-passu clause because at that time in the Peru case the vultures had already been trying to make this interpretation for one. And we asked our lawyers on the record to the judge, is there any way you would interpret this pari-passu clause as he finally did? And he said, oh, that would be very odd. (Laughter.) So he didn’t agree at that time with himself 10 years later.

So basically, this means that as much as the market-based approach and the vulture-proof clauses is a positive and good step to move forward, we still need to think of international framework for sovereign debt restructuring – a legal framework. And that’s why we are, with other countries, very engaged at the United Nations as well.

MR. STIGLITZ: Can I say, I was chief economist in the period running up to Argentina’s crisis. And I think – at least my view, and I think many other people at the World Bank – would have said they should have gone earlier, that it was very clear if you looked at the trajectory where they were going, that an earlier debt restructuring would have been much more positive.

One other thing about the Argentina debt restructuring that they did that I – was very good and we supported, was the introduction of GDP bonds. And one can think of introducing automatic GDP bonds, an automatic conversation. IMF has ideas similar to this in some of the bonds they’ve talked about, of ordinary bonds being converted into GDP bonds, which would be essentially like Chapter 11 where you convert debt into equity. And you know, you’d have to work out the – but in the case of Argentina, those bonds have worked very well in the long run. In the short run, the bond market did not like it. It was a new product and they didn’t understand it. But from an economic point of view, it was really the right thing to do.

MR. FLEMING: The GDP bonds are only going to work if you have credible economic statistics, though.

MR. STIGLITZ: No, but it’s interesting – (laughter) – the distortions in the statistics in the case of underestimating inflation increased GDP and made them pay more than they would have. So the incentives were distorted. Now, I do think that you need to have – I agree with you, you have to have good statistics. But just to make it clear, that the distortions in the case of Argentina in their inflation numbers went the other way and the bondholders did better.

MR. FLEMING: Ambassador, just your comment on that. I mean, the GDP bonds are obviously touted – they have been by the current Greek regime as well, as one way out of these situations. What are your views on them, and especially when there are, as with your country, problems with the statistics?

AMB. NAHON: Well, the GDP lending bonds were, as Professor Stiglitz said, not – were very new, were an innovation that Argentina put forward at the time. So at the beginning investors were a bit – had doubts. But they proved to be a very successful one. And I think that the market has very clearly confirmed that they were a very good investment and they had a very good return. Argentina has been growing for 12 years now at a – at an average rate of 5.7 percent.

And I don’t want to get into the details of the studies to this discussion, which is not a part of the panel, but certainly I – as you all know, we have been doing very positive work with the IMF and others in relation to our statistics process. We are very confident on that work and I look forward for everybody to be clear about our process.

MR. FLEMING: Maarten, can I ask you, what is your assessment of the impact of the IMF reforms were they to go through? Would you worry that restructurings could happen too quickly? What’s – from a practitioner’s point of view.

MR. PETERMANN: (Chuckles.) I’ve learned not to worry too much in my profession about anything, to be honest. I think – you know, a couple of the comments I wanted to make, because we seem to be talking about two issues at the same time. One I think is the issue that Sean mentioned – who decides when to go and do the exchange? Is it a decision – you know, bondholders will never go to sovereigns and say, you know what? Let’s do a sovereign debt restructuring. We see it’s bad and, you know, why don’t we go and sit down. Is it the national government who has to make the first step, and they have, I think, the sovereignty to do it?

Or does the IMF want to say, you know, it doesn’t matter, you know, government, that you think you can still pay. We decide that you have to go to the market and do this exchange. And then the question is, who decides what that exchange is going to look like? You know, is it going to be the IMF which says, you know: Give me your 2020 bonds and we’re going to give you 2030, this haircut? Who decides? I think that is one.

And then the second issue we’re talking about is when such an exchange actually happens, how is the best way to get about or dealing with the holdouts. So from that perspective, it’s unclear to me what actually the proposal is, who’s going to decide and push that button and say – and then after that button is pushed, who gets to decide.

So let’s take the case of Argentina. Would it have been the IMF who have decided to say, you’re going to offer this to the market and we’re going to try and help you deal with the holdout problem? Or is it a matter of national sovereignty that the final decision makers on what to offer is going to be actually the government?

MR. HAGAN: It’s always the sovereign who decides. But the sovereign comes to the fund and says, we would like to have financial assistance. So the fund has to make its own decision as to what conditions it’s going to attach to its financing. The sovereign can walk away from those conditions. So it’s really critical that we be clear that there’s no sacrifice or surrender of national sovereignty here. But the fund has its own responsibility as to basically how it makes it resources available – just like any bank does.

So we have a public mandate. And our mandate is to help countries resolve our problem – their problems. If we feel our resources are being used to just delay and exacerbate a problem we can’t provide financing. The country is free at that point to walk away, but we have to basically manage our resources in accordance with our own mandate.

MR. PETERMANN: But that is already the current framework as it is.

MR. HAGAN: Correct.

MR. PETERMANN: And so I’m trying to understand what the new framework would add to this process.

MR. HAGAN: Well, so let’s – a little bit of detail. So we have – you know, when the fund makes decisions about anything, it comes up with what we call general policies, general sort of regulations that govern the exercise of discretion by the executive board. Currently, that policy allows for the fund to compromise or at least put aside its concerns on sustainability, where there is evidence of contagion. One of our proposals is to eliminate that exception so that contagion would not be a basis for the fund to delay a restructuring, because our view is that actually is a counterproductive element of our existing policy. And that is a very – it’s a limited change, but it’s a significant change. And that’s, I think, one of the central proposals.

MR. PETERMANN: And then to your point in terms of how to deal with holdouts. I think – oh, let’s say, how do you say it – prevention is better than curing. I do think that how many holdouts you’re going to have in a restructuring is very much dependent upon how you design the restructuring in the first place. So there is a price discovery which needs to take place. And you can argue, you know, and it’s – let me take a practical example.

I worked on a tender offer for 25 percent of a company in Austria the other day, and basically the company that I was working for went to market and offered a very small premium. And in the end, 2 percent of the stock got tendered. And I could argue that 98 percent of the capitalists, or of the shareholders, were effectively holdouts; they didn’t disagree – they didn’t agree with the offer. So – and the way that you design the offer is going to probably already tell you whether you’re going to get holdouts, vultures or whatever you want to call them.

So I think there is probably too little understanding at the moment in how the design of the initial exchange that you’re trying to do is going to attract people who are going to basically hold out. And that’s going to be a function of price. That’s going to be a function of structure. And, you know, the cumulative or the collective action clauses helps, but the initial point is vultures are not attracted to debt restructuring per se. They’re attracted to a certain return.

MR. STIGLITZ: Yeah. If you offer them 110% of the value, I’m sure you will get zero holdouts.


MR. STIGLITZ: Yeah. But that’s not the issue.

MR. PETERMANN: The issue is –

MR. STIGLITZ: You go into debt restructuring because you don’t have any money. You make an offer. The case of Argentina, they got, what, 90-some percent?

AMB. NAHON: Ninety-two-point-five (percent).

MR. STIGLITZ: Ninety-two percent accepting, and you had 8 percent holding out. And 2 percent particular – 1 percent were particularly vultures and went to the U.S. court, took advantage of the change in the legal structure in New York State. I mean, we haven’t mentioned that. But how – there was a change in the law that was a gift to the vulture funds and – wasn’t a gift. They paid for it through lobbying. (Laughter.) So let me make it clear: they bought it. And it was something called the champerty defense, which said that if you buy a bond with the intent of suing to get your money back, you couldn’t do that.

MR. FLEMING: But let me – but let me ask the ambassador. I mean, this battle has been going on for a very long time now at extraordinary cost to Argentina. It continues to be, as a result, unable to access the markets in normal terms, and yet it probably could buy these vultures off if it wanted to.

AMB NAHON: Well, we have offered the vultures the same offer that we have been offering all our creditors for some time, and they have rejected one and every offer. And let me make one fact that I think is important clear: These are not investors, financial investors that were positioned in Argentine debt before the 2001 default. These are specific funds that make their business and try to get unwarranted profits getting debt that is already in default. In the case of Argentina, they got their bonds in 2008, and they are trying to make a 1,600 profit out of getting a full payment plus interest. So I think this shows a very specific type of behavior that really, as I said, goes against the possibility and the chance to get funds by the other 92.4 percent of our creditors.

Argentina, a few weeks ago, has to access through domestic-law bonds the financing it needs. We have been also very well-funded by international organizations like the World Bank, the IDB. So we’ve been having the financing that we need and that we want for our infrastructure development, for our social investments. We certainly experienced through the 1990s the worst side of over-indebtedness and of high financial speculation, so we have a very clear stance that we will access financing just for the purpose of our – sustaining of our process of economic growth and of social inclusion, not just for financial speculation, not just as a means of rolling over our debt.

So I believe our case shows pretty well that we’ve had the financing that we want, and we’ve been able to have a very reasonable level of debt. So we are not in the risk that other countries are in terms of not having the resources to pay our creditors. We have those funds. Of course, we have a litigation going on and we want to find a solution to that. But it has to be a fair solution, a legal solution, a reasonable solution, not a solution that will cost Argentina more money and that put Argentina at more risk because it’s not reasonable and sustainable.

MR. FLEMING: Sean, can I ask, from the legal point of view, what have the ramifications been from where you sit from the District Court judgment? How significant have those ramifications been?

MR. HAGAN: So again, you know, we look at this from the perspective of our – you know, our mandate. And you know, where – when we think debt restructurings are needed and we’ve initiated one, it’s important that we have some degree of certainty that when a majority have agreed there will be an agreement, because actually one of the problems – if there’s uncertainty at the end of the process, that actually might also delay the initiation. So the two – the two ends of the restructuring process are related.

Now, you know, in some respects this is not unique to sovereign debt restructuring. I mean, you know, it’s a form of market failure when basically you don’t have appropriate collective action amongst creditors. As Joe has indicated, traditionally in the sovereign context it wasn’t a significant problem because, quite frankly, the ability of holdout creditors to exercise real leverage, lender leverage against a sovereign, was limited because the assets that are available of a sovereign for attachment are limited.

The novelty of what happened in Argentina is that the holdouts didn’t need assets. They actually were able to get the court to stop payments to the creditors that actually had restructured. So it was very novel. And you know, they used the pari-passu provision as the basis for that.

So, you know, from our perspective that will, by definition, going forward increase the risk that you’ll have more holdouts because you have a strategy now. Secondly, if you’re a creditor who’s thinking of being – of going into the deal, you may be worried that the payments to you are going to be actually stopped. So for those reasons, there is a concern.

Now, how significant is this concern? And here I think the Fund’s staff is relatively nuanced because it’s not just the District Court decision, it’s the Court of Appeals, Second Circuit. It’s not entirely clear – and there’s been a lot of discussion about this – as to whether or not this court decision is going to have broad applicability or is somewhat limited in terms of its precedential value to the circumstances of Argentina. There’s different – and the Second Circuit decision is actually somewhat difficult on this issue, and it’s been interpreted a different way by both academics and in the market.

But put it this way: the market itself has been sufficiently concerned that it is the market that has wanted to come up with new collective action clauses to address this problem. So it’s not just the official sector that’s worried. Creditors themselves – because, you know, when they go into restructuring, from an inter-creditor equity perspective, they don’t want to go into it and find out that there’s a lot of holdouts. So even the market has recognized that there’s sufficient risk that they have actually taken upon themselves to have a discussion about collective action clauses that address this issue. So I think it’s not just an official sector perspective; it’s a broad market perspective.

MR. FLEMING: Maarten, have you seen a change in the way issuance is happening? Has issuance gravitated away from New York law as a result of this case? Or what kind of market changes has it created?

MR. PETERMANN: You know, to start with, you know, why is New York law as important as it is? And that’s because most of the money that is available for investing in sovereign debt is basically in the U.S. And U.S. fund managers and – you know, they have specific views, they have regulations, they have rules that they need this framework in place in order to – and it’s not a judgment call they make on the legal framework in the country itself. For instance, you know, I am a Dutch person. We have a perfect legal system. But, you know, no American – (laughter) – we actually do – (laughter) – but no American will buy bonds under Dutch law. It’s not because they don’t like it. It’s just because they don’t want it. They want to stick to a certain format which they know, and they don’t have to defend it.

So from that perspective, moving away from New York law, you move away from a huge pool of money, which moves away from best pricing. So from that perspective, we see people just coming to market under New York law. Why? Because you’re going to sell it to the funds that –

MR. FLEMING: So then people are sticking in it.

MR. PETERMANN: Yeah. And people get very emotional. You know, I remember one of my first deals, I wanted to sell to U.S. investors. It was a fantastic deal. And they said, come back when you put it under New York law. And I said, why? You know, it doesn’t make a difference. They said, for us it does make a difference.

So the reason why we have these bonds under U.S. law and U.K. law is because that’s where the fund managers are. That’s who are the people who actually make the decisions. And when you actually see – and that is one of the things which is I think a little bit under-highlighted in some of the readings I’ve done is, you know, you need to follow the lifecycle of the bond during a restructuring process, because initially in Greece, for instance, you know, all the bonds were held by insurance companies, et cetera. Why? Because they don’t have to hold capital against it, even if it has a B rating, is triple-C, et cetera, when it moves down. But you see the churning of the bonds happening. So the people who initially buy into the original issue, they’re not going to be the ones sitting at the table towards the end because at some point all the passive investors, you know, they get scared, they start selling them. And that is actually a good process because it lowers –

MR. FLEMING: OK. Sorry, I’m going to interrupt because I’m conscious we’re running low on time for questions. Just to pre-announce, Professor Stiglitz does have to leave slightly early, so if you have specific questions for him now is probably the time to get them in. I’m already seeing hands going up very rapidly.

So let me start off here, please.

Q: Thank you. I’m Alessandro Leipold from the Lisbon Council, chief economist there. Just to confuse matters, it’s actually in Brussels, but it’s called Lisbon Council. (Laughter.)

For full disclosure, I am an ex-IMFer, actually way back when worked on Anne Krueger’s SDRM proposal. And I wax nostalgic not just because I was a lot younger then – that’s a factor – but also because I really miss the Fund that was taking a leading position at the time. I think the Fund has now backtracked, is too timid, has accepted the contractual approach as a given. It may be realpolitik, I realize that, but that shouldn’t impede it from still making the cause for a contractual approach – I mean, a statutory approach as the first best.

And you know, the contractual approach that’s being advocated I don’t think answers the two flaws that Professor Stiglitz pointed out, too late and not deep enough. It will be too late because, if the IMF has to really find that a country’s debt is unsustainable with high probability, that’s a very high bar to pass. The Fund doesn’t like to label countries. It never labeled anybody as being fundamentally misaligned in its exchange rate. It’ll take ages before it labels anybody’s debt as being unsustainable with high probability, number one.

Number two, that will only then trigger what is sort of euphemistically called re-profiling. And that’s not deep enough; we know that. And so I don’t really see how – you know, sort of, great, it’s good to play – get rid of the – get rid of the – what is it, the contagion clause that should have never been approved in the first place and then fiddle around with collective action clauses and other things, but it’s not going to solve the fundamental problem.

MR. FLEMING: Let me take – thanks, Alessandro. Can I take another question and we’ll just do a couple? Yes, please.

Q: Hi. My name is Monica Houde (ph) and the question’s for Professor Stiglitz.

MR. FLEMING: Sorry, could you – sorry, could you identify yourself a little bit louder?

Q: My name is Monica Houde (ph) from Georgetown University, and the question’s for Professor Stiglitz.

And I’m just – I keep thinking about the lesson, the political lessons of the Argentinian crisis, and I was wondering what you have to think if Nestor Kirchner wasn’t so aggressive in his – in his debt restructuring, if he were less belligerent. Do you think that the U.S. government would have better goodwill toward what’s happening now? You know, because the government here is pretty much silent and it’s a court decision that is creating so much – so counterproductive to the markets. And I wonder, why the government’s silence? Do you think that Nestor Kirchner’s way of dealing with the debt restructuring is a – is a factor in that? Thank you.

MR. FLEMING: OK, thanks. Let me take those two, and in reverse order. So perhaps, Joe, if you could start with the last question, and Ambassador, you could chime in on that as well.

MR. STIGLITZ: Yeah. I think the answer is it would not have made any difference. I mean, you talk about less aggressive. If you include the – both the haircut that it demanded plus the GDP bond and you look what the bondholder has gotten, it’s very similar to what people have gotten in other debt restructuring. But using GDP bond gave it the flexibility that enabled it to grow at 8 percent from the time of the restructuring to the 2008 crisis, which is – it was one of the fastest-growing countries in the world after China. I think it was the number two. So without that flexibility, they would not have been able to do that.

I think the criticism of Argentina is that it stood up, and people don’t like people who are debtors to talk loudly. I mean, I think that’s basically what it’s about. And the other countries that were meeker, and you said 70 – you know, there have been a lot of restructurings. Those people who gave in easily and then had to have another restructuring three years later had a(n) enormous weakness in their economy, as we’ve seen for instance in Greek, where it was not a deep enough debt restructuring. Yes, they were meeker, but it was not good for their citizens. It wasn’t good for the global economy.

Can I answer the first question a little bit, too, or do you want to –

MR. FLEMING: Go on briefly, because I do want to go to Sean.

MR. STIGLITZ: Oh, very briefly.

So I agree very strongly that the contractual approach isn’t enough, partly for the reasons that you said. Partly also is we haven’t had a good discussion of the difficulty of getting a good aggregation clause. Aggregation is, how do you add up different bonds with different exchange rates, different maturities? And I – there’s been no resolution of that. And what makes this particularly difficult is you have bonds in different denominations governed by different jurisdictions. In crises, exchange rates can move a lot. And if you saw that in the ’97-’98 crisis if you used the exchange rate for Indonesia before the crisis or you use it afterwards, who was a majority of voters is totally different. So it’s very, very hard. Now, you know, there are rules that you could use, but I worry about this.

MR. FLEMING: Ambassador, just your thoughts on the – on the –

AMB. NAHON: Yeah, I think that, as Professor was saying, Argentina stood up to its people and it’s going to stand up to make sure that our debt is consistent with our economic growth and our sustainable development policies. And this is very, very important for us because we went through a very severe crisis in the past and we want to make sure that that is not against our national interest again.

I think that there’s another issue that is important to highlight in relation to how much Argentina is a precedent or not. On top of what has been said, the fact that there are already 10 countries around the world that have issued debt with these new so-called vulture-proof clauses shows that this is an issue of concern for all of them. But also sometimes it’s not only about the legal aspects. The precedent that is very harmful and that shows how aggressive and extortionary vulture funds have been is that just by showing up in some debt restructurings, like in the Greek ones, they are getting full payments against what’s going on with other creditors. So sometimes they don’t even need to bother to litigate, but because of the tool that now they have and that has been granted to them in the New York courts, and because national sovereigns know what these funds can do in terms of harassing – harassment of governments, in terms of blocking some series of the debt restructuring, what’s going on is that they have been granted full payment, like in the 2012 case.

So I think this shows that there is a whole dimension of financial, but also political aspects of how to deal with this behavior; and that the technical discussion is really very, very important, but also the political will of countries like it’s going on to really engage and make sure that debt restructurings are rational and efficient and sustainable and are fair.

MR. FLEMING: Thanks.

Sean, your views on Alessandro Leipold’s question in terms of, you know, your timidness – (laughter) –

MR. HAGAN: Alessandro, it’s good to see you again.

So, you know, like Alessandro, I worked on the SDRM, the Sovereign Debt Restructuring Mechanism – (laughter) – for two-and-a-half years of my life with Anne Krueger. So I – you know, at the time I was intellectually very invested in this.

And the reality, however, is that when we started this most recent wave of discussion on sovereign debt, we posed the question to our Executive Board and our shareholders whether or not there would be adequate support for a statutory framework. And the answer was the same answer that we got 14 years ago, which was no. So given the fact that there was the – there was not going to be adequate support amongst our membership to pursue that, we had a choice: we do nothing, or we come up with more incremental approaches that are still, in our view, a significant improvement over what we have now – which is the approach that we’ve taken.

The second point I would make is that even if you had the SDRM, Alessandro, it would not have addressed the issue of too little, too late because ultimately the question as to whether or not a sovereign initiates – because it is a sovereign decision – ultimately will come down to the Fund’s lending policies. And the Fund’s lending policies, in my view, are at the center of the discussion of the timing, and that’s where I think we need to have a further discussion.

The ideas that I mentioned today are just the staff’s thinking – for example, eliminating the systemic exemption. There may be others. There were those 14 years ago that wanted automatic caps on the amount of Fund lending, so after a certain amount essentially there would be no choice: The Fund would have no discretion. We do not want to have a(n) automatic approach. We think that in this area there is a need for judgment. But at the same time, we need to have criteria that do not lead us into a path where we have considerable delay.

So this is an issue, Alessandro, that is not a function of the SDRM. It’s a function of our exceptional access policy, and that’s what we need to address.


Q: Thank you. I’m Arturo Porzecanski with American University.

I was wondering if I understood correctly the proposals that you, Professor, and you have advocated. They tend to bind the creditors more tightly, right? But they’re not intended to bind the sovereign more tightly, right? And what if the sovereign if the problem? What if you have a sovereign that, say, signs treaties like bilateral investment treaties and then is found to have violated them, or they sign clauses and the contracts are found to have been violated? Are we making any progress on dealing with sovereigns?

MR. FLEMING: Thank you very much.

In the front, please.

Q: Thank you very much. Alex Vierter (ph) with CGS (sp).

It’s a little bit of a follow up to the previous question, and it goes to the question of sovereignty and how to deal with a specific case, which is the case of Greece, on everybody’s mind, when you have a sovereign that should be the trigger but it’s actually a sovereign that doesn’t own his central bank – its central bank, because the central bank is a shared one, and you cannot really say that Greece – as well as other member countries of the monetary union – is a full sovereign. So can a partial sovereign trigger such an event, as well as Argentina, for instance? Or is it a different case that we’re dealing with in the context of the monetary union, especially given the backdrop against which, you know, we’re seeing all this cash crunch at the moment, which is repayments to your institution, the IMF, and repayments to Greece’s central bank, the ECB? That’s really what they’re dealing with, because the maturity of everything that they have received through the FSF is something that is going to happen much further in the future. So I wonder whether – you know, what views you have on that. Thank you.

MR. FLEMING: Sean, on the – on the second one, I’m not sure how much you can comment on Greece.

MR. HAGAN: Yeah, I don’t really want to get into a discussion on our ongoing negotiations with Greece. I would say that, you know, countries surrender different dimensions of their sovereignty. It’s not a binary situation. You know, countries will surrender when they enter into monetary union monetary policy, but on the decision as to whether or not to restructure their sovereign debt, they have not surrendered that.

So you know, I want to come back to the point that you had made, which is I think it’s really important here that we – you know, we make it clear that we are talking about sovereign countries who ultimately have to make their own decisions in terms of their economic destiny, but they also – when they are denied market access, they are dependent on financing from other sources, and those creditors have to make their own decisions based on their own mandate. And that’s the basis of the negotiations that we have.

MR. FLEMING: Maarten, do you have any thoughts on the particular EMU instance? And also on the professor from American University’s questions about what if – what if the sovereign itself is the problem.

MR. PETERMANN: Yeah, from a – let me give you a practical example. It was actually something I was involved with I think eight years ago, when an insurance company came to me and they showed me a contract. They had bought an insurance company in Eastern Europe after the privatization and they restructured it. They owned 33 percent and they had a contract from the sovereign saying: under these conditions I’m going to sell you the majority. And the sovereign refused. The sovereign said it was a different government who signed that, we don’t like this agreement anymore, we’re not intending to honor this contract, and actually we would just like you to leave, which was a pretty tough situation to be in, and especially when the sovereign owns the regulator, which can make your life very, very difficult. And we basically – and this was my early lesson in terms of how to deal with sovereigns in sovereign situations – there’s not much you can do. Every arbitration court we went to said you have to honor the contract. They didn’t. Every time the prime minister of my country met with the prime minister of that country it was raised, and said, sorry. So after two-and-a-half years, we basically – I told the client, it’s like, listen, whatever’s going to happen, we’re not going to get it, and you’re just going to have to settle and you’re going to have to move on. It’s a very practical approach. Is it right? No. But does it happen? Yes, and it happens quite a lot.

And it’s a little bit a question of – and I think Mr. Stiglitz mentioned – who is the big boy and who is the small boy. The reality is, in every transaction I’ve dealt with with governments, the people who I actually sometimes work for, they’re actually the small boy because from a perspective there is nothing you can do. We had one of the biggest blowups in derivative history take place in my country, which I helped resolve, and the sovereign came and said you all thought there were 12 banks in the room, you all thought you had security, guess what? You don’t. And we’re going to file this thing for bankruptcy in four days. There is a 3 billion loss. You’re going to take a billion haircut and you sort it out amongst yourselves who’s going to be taking it. Was that the right thing to do? You know, I understand the perspective of the country, you know, and that is what I try and encourage my clients in those kind of situations who sometimes desperately cling onto a contract which, I said, it’s not going to be enforced, that’s the rules. You know, to a certain extent, that is the way – if you go into a country where you’re effectively a tourist, you know, this is – your negotiating position is zero.

And in the end, in the case in Eastern Europe, we settled. We got a – you know, after a lot of rhetoric and a lot of – because it was a very large insurance company which we were dealing with, there was a lot of rhetoric, there was a lot of, you know public interest in it. We reached an agreement with government, we sold and we moved on. And everybody to a certain extent was happy. So I try to encourage people to see the perspective of the negotiating position that they have. And sometimes, you know, a contract is just a piece of paper.

MR. FLEMING: Ambassador?

AMB. NAHON: Yeah, in our own case, if there’s something that the government had – has been doing since 2003 was to move forward into normalizing and regularizing a very difficult situation in relation with our debt that was a result of the 2001 default. We moved forward in paying and establishing – settling all our debts except this very specific group that we have been discussing today, which is the vulture funds that don’t want to accept Argentina’s offer. So I certainly agree with what has been said, that the decision to restructure needs to be a decision by the sovereign. But it has to be, and it can be, compatible with honoring its international debts. In fact, in our case, we paid all our debt to the IMF in 2006, which we couldn’t do before in the 1990s, in which we were rolling over our debt. So in fact a good restructuring was absolutely compatible with honoring the debts, paying the debts, and moving forward in our process of economic growth.

MR. FLEMING: Thanks.

Next, a question towards the back, please.

Q: Hello. Rob Shapiro from Georgetown, Sonecon and ATFA. Thank you.

Let me say I find it a little peculiar that sovereigns are being presented as the kind of weak party here as against individual investors, whether they’re hedge funds or pensioners. In the case of Argentina, the holdouts include tens of thousands of individual pensioners in Italy. But the main point I want to make here is that the more you constrain the rights of lenders, the less likely lenders are to enter into that market – that the ultimate result of this will be a reduction in the availability of global funds for developing countries, and the countries which will be harmed the most will be the poorest countries.

One last point. For example, you know, Argentina, in floating the bonds that had to be restructured, explicitly chose to not have a collective action clause, explicitly chose to give up sovereign immunity in that case in order to get a better interest rate. It was an economic decision. The same kind of dynamic will occur as you constrain the rights of lenders in favor of sovereign borrowers.

MR. FLEMING: Thanks.

Another one, please. Not at the moment.

OK, Sean, can I – can you take that one from Bob Shapiro? I mean, do you – do you end up having a sort of self-defeating effect from these reforms, in the end?

MR. HAGAN: Not really, because actually I kind of agree with what you said, which is that we don’t want to have a system whereby we are creating a framework that allows for strategic defaults. That’s the last thing we want. You know, the IMF’s perspective is that we want to basically promote sovereign debt as an asset class. We want – we want, basically, credit to flow into, you know, the sovereign countries. So we want restructurings to be exceptional, to be really only when absolutely necessary, but those times will come. Those times will come. And when they come – when they come, the question is, how do you do it? That’s what we’re talking about here. And I – but I agree that we should avoid a situation where default becomes a painless process. Essentially, we think it’s important to support sovereign debt as an asset class.

And you know, it’s like any insolvency system in any country. You want to have a system that ultimately encourages the flow of credit, right? And it’s only to be used when essentially there is no capacity to repay. So we’re talking about that – and I know I’ve said that a number of times, but given your question, I want to emphasize that.

MR. FLEMING: Ambassador?

AMB. NAHON: Yeah, I think that sometimes here in Washington some people try to present defaults – and they did this in the case of Argentina – in a very unfair way, as some sort of, like, wild party which a country just enjoys going through, and that’s an absolutely irresponsible way to present it. We’ve been through a default as a country. It was our toughest period of our history in terms of economic, social-wise. Our poverty levels were over 50 percent. Unemployment rates were over 23 percent. So it’s not a good thing. And we went through that default because of the policies that the governments at that time; it really were very unsustainable, and in fact very much celebrated by the international community at that time.

We moved from that. Since 2003 we have a different model. And we have been, in fact, providing a very attractive and profitable investment to offer for our investors, both in terms of our FDI investors and our financial investors that have been getting a very good return from our bonds, performing bonds.

The bonds that are currently under discussion, of course they didn’t have collective action clauses because they were issued in 1994. Those are the bonds that people like the one that made a common litigating against Argentina, bonds that at that time were according to the international practice. And in fact, in 2003 there has been a new trend of new bonds with new clauses that has proved, 10 years later, there was not enough, in fact, to protect country. So now we’re having a new trend of new bonds and clauses that are recommended by international capital markets.

So I think that leads me, again, to the conclusion that there are no fully vulture-proof clauses. There are no clauses that you can really include in your bonds that will fully protect you because in this case what we saw is a judge that made a decision that, in fact, was a scandalous change of the rules. That was not only against market practice – and that’s why the International Capital Market Association and so many market practitioners question – the U.S. government itself explicitly mentioned that it was against a market interpretation of the pari-passu clause, but also we believe against international law because the remedy that was crated interfered with funds that – (audio break) – against sovereign immunity. And in fact, there has been an expropriation of third-party rights, unrelated good-faith creditors from Argentina that have been blocked from collecting their bonds.

So I think the discussion is much more sophisticated, and it’s good to have it here. But certainly talking about the 1994 bonds, it’s pretty – a pretty misleading way to present the issue.

MR. FLEMING: Maarten?

MR. PETERMANN: I think the gentleman makes a very good point. And that’s one of the things which I missed a bit in reading up on the topics, is that people talk about, OK, we would like to have this thing in place, but there’s very little debate about what’s it going to cost – and what’s it going to cost not in terms of having an organization to do that, but in fact what you’re alluding to is, you know, are bond spreads going to go up 1 percent, you know, effectively? And are, effectively, the poorer countries are going to – who have no intention of defaulting, because I think there are approximately 160 countries which issue foreign-law-denominated debt; not all of them plan to default – I hope most of them don’t, but typically two or three. And then the question becomes, if you go into a new framework which is different, are you going to alienate the current investor group, which basically means the amount of money that is available is going to shrink and as a result you’re going to increase interest cost; and two – yeah, let me just park it there – is that – because I miss it completely in all the readings.

I did read a report from Moody’s saying it’s not going to impact the credit rating because a credit rating is driven by likelihood of default, not in terms of what the recovery effectively is. But the reality is you’re going to be fishing in a smaller pond. And that is something you want to avoid because, you know, the best interest of a country is to have the lowest possible interest because, from the perspective of the country, every dollar you save on not paying interest is money you can spend on the economy. So it’s not really clear to me if anybody did add up the sums. If you have 900 billion of sovereign debt, you know, if it’s going to cost you a percent in spread-widening, that’s going to be 9 billion a year. Is that price worth paying for having maybe a little bit more robust framework around the one or two cases that default?

To the point of the ambassador, I sympathize. You know, I work at a bank. You know, we get bad court judges all the time. Actually very few, you know, judgments we ever got were actually favorable towards the bank. So when you go through this process of having a judge, it’s a very risky thing effective to let it come to fruition. That’s why there is actually very little case law because none of them actually come to that final moment where a final judgment is effectively made. People prior to that, when they kind of assess – and we do that as a bank as well, when we are in court proceedings, et cetera – you’re going to have an inkling in terms of am I going to win or am I going to lose. And there’s very little case – and that’s one of the reasons I think there is so much written about Argentina, because there is so little else to effectively write about because most people don’t let it come to the full life cycle. You walk away.

There was actually probably one case this year in Europe where it actually went to a judgment. Most people go through this process, then sit in a room and you avoid a final judgment. And that avoids setting precedents and other interpretations like – you know, that we all have to worry about; you know, how is this going to impact? You know, it shouldn’t come to that point. We never let it come because you never know with a judge. It’s highly unpredictable. You know, he might have been divorced the day before, is in a bad – you know, it’s – (laughter) – you don’t want to let it come to a decision of a person who wasn’t there at the time and who is not from the country. And I get frustrated as a banker sometimes when I see some of the cases I have to work out and I see – and I actually read the court judgment. And sometimes they come to the right conclusion, but through a detour, which is like, how did you think of that? And it’s understandable because it is a – he wasn’t there at the time. And I’m – and I’m very passionate about that, you know, these things should be resolved by the people who were there at the time, not by an independent arbiter who, you know, has all sorts of views or political ideas or anything like that. I strongly recommend, as a banker, to avoid these kind of things. (Laughter.)

MR. FLEMING: Banker says avoid lawyers and judges, right?


MR. FLEMING: Well, perhaps on that note I’ll call the debate to a close. There’s, as I said, 70 restructurings since 1970. Probably we can all agree there are many more ahead of us. This debate will continue to rage on. But as it does, could you please join me in thanking very much our distinguished panel? (Applause.)