Here's What Could Happen to Venezuela's Messy $170 Billion of Debt

There are a bunch of questions right now about the future of Venezuela, and one of the big ones is what's going to happen to its circa $170 billion pile of debt. Some investors have been snapping up defaulted Venezuelan bonds, betting that a future restructuring could hand them a hefty payout. Others argue that the Venezuelan people shouldn't be saddled with debt issued by an authoritarian regime. In this episode, we speak with the legendary lawyer Lee Buchheit. Lee has worked on more than two dozen sovereign debt restructurings over the course of a 40-year career, including those of Iraq and Greece. He explains how a Venezuelan debt workout might unfold and the unique challenges that arise when trying to restructure the obligations of a sovereign nation. Read more:Santander, BBVA and Deutsche Lead $3 Billion Repo for ArgentinaDonation From Century-Old Fund Cuts UK Debt by £607 Million Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Tracy Alloway?

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• 2:43Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 2:48Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:49Tracy Alloway?

  Joe, Venezuela.

• 2:50Joe Weisenthal?

  Venezuela week.

• 2:51Tracy Alloway?

  So we've done the oil market.

• 2:53Joe Weisenthal?

  Yeah.

• 2:53Tracy Alloway?

  We got to do the debt market.

• 2:54Joe Weisenthal?

  We got to do the debt market. I don't know anything about this stuff. So we got to do it.

• 2:58Tracy Alloway?

  One of the reasons that I really like covering the debt market.

• 3:02Joe Weisenthal?

  Yeah.

• 3:02Tracy Alloway?

  Bonds is because I think we're used to thinking of bonds as contracts.

• 3:07Joe Weisenthal?

  Yeah.

• 3:07Tracy Alloway?

  But I always like to think of them more as stories.

• 3:11Joe Weisenthal?

  Yeah, yeah.

• 3:12Tracy Alloway?

  So they're full of all these narratives and embedded values.

• 3:15Joe Weisenthal?

  Yeah.

• 3:16Tracy Alloway?

  And history. And there's actually a great quote from Margaret Atwood. She wrote this whole book called Payback on Debt. And she describes it as a story or a memory of who owes what and why.

• 3:28Joe Weisenthal?

  Yeah.

• 3:29Tracy Alloway?

  And of course, if you're talking about a story or a narrative, those can change over time, right?

• 3:34Joe Weisenthal?

  Absolutely. I mean, so one thing I know is that just since Saturday morning and the early trading, I think the existing defaulted Venezuelan debt that's out there, I think it's rallied. I think it's gone up.

• 3:45Tracy Alloway?

  Oh, yeah.

• 3:45Joe Weisenthal?

  But I don't understand, like, you know, you're trying to get the economy going again. You're going to make everybody pay for this money that was borrowed by someone who the international community regards to be illegitimate as a dictator. If anything, shouldn't the creditors that facilitated his ongoing rise, shouldn't they have to pay? Not only should they not get paid back, shouldn't they pay the people of Venezuela extra for having subsidized someone that is widely regarded to be a criminal? We're calling this guy an narcoterrorist and yet, so it's like, shouldn't we punish the people who lent to him?

• 4:19Tracy Alloway?

  Maybe you should be on the restructuring team, Joe. No, but it's true. So this is the debate. So you're right. Bonds have rallied. So there's Venezuelan sovereign debt. There's also debt issued by PDEVISA. And those have gone from like five cents on the dollar a few years ago to more than 30 cents.

• 4:35Joe Weisenthal?

  Wow.

• 4:36Tracy Alloway?

  So people are already making money. And the bet here is that there is going to be some sort of restructuring and they're going to get more money. And of course, the creditors, the investors always want more.

• 4:48Joe Weisenthal?

  Of course.

• 4:48Tracy Alloway?

  Meanwhile, there's a strong argument that the Venezuelan people should have their debt load alleviated in some way.

• 4:55Joe Weisenthal?

  Yeah, I'm in favor of a negative recovery.

• 4:57Tracy Alloway?

  Okay. All right. Well, we really do have the perfect guest.

• 5:02Joe Weisenthal?

  Absolutely.

• 5:02Tracy Alloway?

  To talk about all of this, someone we've had on the show before, but it's been a while. We're going to be speaking with Lee Buchheit. He is a retired lawyer now. He's had a 40-year legal career, worked on more than two dozen sovereign debt restructurings, including Greece and Iraq. And that's going to be relevant to this conversation. So really, the perfect guest. Lee, welcome back to the show.

• 5:27Speaker 05

  Thank you, Tracy and Joe. Good to be back.

• 5:30Tracy Alloway?

  Maybe just to begin, can you sort of set out the scene of the creditors and the debt that Venezuela actually owes? Who owns those bonds? And how much debt are we talking about?

• 5:45Speaker 05

  In total, probably now, the Venezuelan debt is someplace between 150 and 170 billion. Not all of that is bonds, and that's one of the issues that we should discuss. The bonds that we're talking about are principally Republic of Venezuela and Pedabasa bonds, roughly split 50/50. They were issued during the Chavez and early Maduro periods. They went into default, all of them, in the fall of 2017. You remember Mr. Trump in his first

• 6:26Speaker 05

  term imposed sanctions on Venezuela in August of 2017. The response was to have the bonds go into default, and they have remained in default since then. One of the difficulties that Venezuela will face in restructuring its, what I call, legacy debt stock.

• 6:50Speaker 05

  Is that there are all kinds of other liabilities that are not in the form of bonds. So there are unpaid trade creditors. There are holders of arbitration awards, chunky arbitration awards. There are people with blocked deposits in Venezuela. And so the restructuring, when and if it comes, will not be the simple, homogeneous kind of restructuring that we're used to where there are bonds or in the old days, bank loans. This is going to be a much more diverse creditor group.

• 7:29Joe Weisenthal?

  Is there a formal hierarchy that exists either in written law or in norms that sort of establish who comes first when we have these multitude of instruments? Or is it the type of thing where the conditions of each country, depending on what they are, et cetera, and maybe the conventions, not necessarily written down the same way in formal law, will help sort of determine that waterfall, I suppose?

• 7:56Speaker 05

  Nothing in law, but in convention, debts extended by the multilateral institutions, the IMF, the World Bank, the Inter-American Development Bank, that sort of thing, are treated as preferred creditors. So they will not be restructured in a formal sense. Once you come down from that level, then you have government debts. So, you know, debts extended by France, Germany, the United States, typically for export encouragement, and then commercial debts.

• 8:36Speaker 05

  And that can be bonds, bank loans, and these various other sorts of things. They all rank equally.

• 8:43Joe Weisenthal?

  Okay.

• 8:44Speaker 05

  Now, the government creditors would like you to believe that they have some kind of intermediate seniority, but in fact, they don't.

• 8:55Tracy Alloway?

  So Joe touched on this in his emotional intro.

• 8:59Joe Weisenthal?

  I wasn't expecting to get so irritated, but it's like, we're calling this guy a narcoterrorist and they have to pay back his debts.

• 9:05Tracy Alloway?

  There's an inconsistency there, sure. Lee, what about the old odious debt argument? This idea that if debt is issued by, I guess, an odious regime or an illegitimate regime of some sort, then maybe you don't have to pay it back at all.

• 9:21Speaker 05

  Yeah, this is a very sensitive area, Tracy. International law is very strict in saying that governments succeed to inherit the obligations of their predecessors and no matter how different in political philosophy one administration may be from another. So the Bolsheviks take over from the czar in 1917. International law says the Bolsheviks have got to honor the debt. Napoleon Bonaparte honored the debts of the Bourbon monarchs that he followed. The exception, there are very limited exceptions to that.

• 10:03Speaker 05

  One of them that was first talked about in the early part of the 20th century was odious debts. In its original formulation, that meant a debt incurred by a dictatorial regime where the proceeds were not used for the benefit of the citizenry of the debtor country and where the creditor knew or should have known that the dictator was going to steal the money. So it was a pretty narrow category. It was resurrected in 2003 in the context of Saddam's Iraq.

• 10:47Speaker 05

  And there was a push there.

• 10:51Speaker 05

  By among others, many in the George W. Bush administration who wished to have Saddam's debts disavowed on the basis that they were odious. My view at the time was that that was ill-advised, that the doctrine of odious debt is sufficiently gauzy, that it is not something that the international community could have endorsed because once you start down that road, there are a lot of sketchy characters out there whose debt you might want to disavow. So my view at that time was that Iraq would be able to achieve very significant debt

• 11:35Speaker 05

  relief without unfurling the banner of odious debt.

• 11:41Joe Weisenthal?

  Can you explain a little bit more what you see as the negative consequences of this notion of odious debt? Because I think a lot of people just, maybe their heartstrings, they're like, yes, we should start using this principle. Saddam bad, the lenders to him probably had a reason to think he was a bad guy. What do you see as the cost of introducing this concept into sort of sovereign debt law or norms?

• 12:05Speaker 05

  Yeah, Joe, I entirely understand the emotional argument. It strikes most people as reprehensible.

• 12:12Joe Weisenthal?

  Yeah.

• 12:13Speaker 05

  That you could have a dictatorial, kleptomaniacal regime that signs a contract on behalf of the Republic of Ruritania, and when that son of a bachelor exits the stage, the poor people of Ruritania have got to repay that debt. That's the emotional argument. The other side of it is, what constitutes an odious debt? You can have an odious regime that borrows money to build a children's cancer hospital.

• 12:54Speaker 05

  On the other hand, you can have a democratically elected regime that borrows money to finance a terrorist organization. What happened in the Iraq situation was the Bush team really would have defined it as any debt incurred by an odious regime.

• 13:18Speaker 05

  Okay, even if you take that, tell me, what is an odious regime? Is it one that makes war on its neighbors? Yes, probably. Is it one that is insufficiently attuned to environmental factors? Is it one that misprizes women? Tell me what's odious. And once you start down that road, pretty hard to find a regime that would, to everyone's satisfaction, be regarded as virtuous.

• 14:11Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and research get you up to speed on what matters and what to watch next, about the time it takes to grab a coffee. So, search Barclays Brief wherever you get your podcasts.

• 14:37Speaker 01

  This is the Bloomberg Tech Minute, brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk, and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 15:19Speaker 01

  and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

• 16:00Tracy Alloway?

  Talk a little bit more about the Iraq restructuring, because this seems to be the previous sovereign debt restructuring that people are drawing a lot of parallels to with Venezuela. So you have an oil-producing country, operating, as we've been discussing, under an authoritarian regime, to put it mildly.

• 16:19Joe Weisenthal?

  An alleged narco-terrorist.

• 16:20Tracy Alloway?

  Yeah, okay. Well, Saddam Hussein was never a narco-terrorist, was he?

• 16:25Joe Weisenthal?

  I don't know. I don't know. I don't remember. I was only like, I was like 11.

• 16:30Speaker 05

  Narco-terrorism is probably one of the few sins that Saddam did not commit.

• 16:36Tracy Alloway?

  Yeah, yeah, okay, a point in his favor. Talk about the parallels here. Can we look at the Iraq sovereign debt restructuring, which I think ended up being something like 10 cents on the dollar for creditors? Is that the guiding light here? Would you expect Venezuela to follow a similar path?

• 16:53Speaker 05

  No, no. Iraq was unusual for this reason. You remember that George W. Bush, George II, put together a coalition of 40-some countries. Saddam was ousted after a full invasion of the country. So the country was run by the Coalition Provisional Authority, largely led by the United States, but the Brits were there and there were some others. They really did run the country, not in the way Donald Trump says he runs Venezuela. At that point, the Coalition Provisional Authority really did run it.

• 17:32Speaker 05

  The Bush team really wanted that experiment to succeed. They wanted a stable, democratic Iraq, right in the middle of the Middle East, someone that would support Israel when that became necessary. They wanted a bulwark against Iran. And they really wanted it to succeed. And their perception at the time, this is now 2003, 04, was that

• 18:09Speaker 05

  This miasmic cloud of debt that Saddam had accumulated and ceased paying, by the way, in nineteen ninety, when the Security Council put sanctions on him. That debt stock would effectively keep anyone from investing in Iraq, lending it money and so forth. So it was viewed by the Bush people as a major obstacle to the economic recovery of Iraq. And so they issued the mandate, "Deal with that debt stock in the most expeditious way possible." And as far as they were more of Joe's view

• 18:52Speaker 05

  that they didn't like Saddam Hussein and they didn't like anyone who lent money to Saddam Hussein. So they had little sympathy for the creditors. The United States had a very limited exposure. So this was a relatively harmless position for the US government to take. But their initial proposal was to go and and say, "The debt is odious. Let's write off a hundred percent of it." And we went to the Paris Club, the group that negotiates governmental, intergovernmental debt, I think with a proposal to write off ninety-five percent of it. In the end, eighty percent of it was written off.

• 19:37Speaker 05

  And that was absolutely extraordinary for a middle-income country that sits on the fourth-largest oil reserves in the world. But that was the mindset of the Bush people. I don't see Donald Trump having any particular solicitude for the citizens of Venezuela. His solicitude seems to be for the oil companies and perhaps for the US government itself.

• 20:05Joe Weisenthal?

  That's interesting. I mean, who are we? I was supposed to speculate into Donald Trump's mind because on the other hand, you know, it's like oils at $57 a barrel. Do the oil companies want to spend tens of billions of dollars rebuilding this? Do they want even cheaper oil right now, which would presumably happen if the taps turn on in Venezuela? Unclear. Setting all that aside, and maybe we'll get a little bit more to Donald Trump mind reading in a moment. What do we know about the holders of Venezuelan debt or Peta Vesa debt? Are we able to tell what type of institutions or entities are currently holding it?

• 20:41Tracy Alloway?

  Joe, there's a function on the terminal called HGS, which stands for holdings, and you can look it up.

• 20:47Joe Weisenthal?

  Okay, well.

• 20:48Tracy Alloway?

  But I'll leave it to leave.

• 20:49Joe Weisenthal?

  Yeah, leave us the terminal.

• 20:50Speaker 05

  No, no, it's mostly traded into the hands of hedge funds.

• 20:54Joe Weisenthal?

  Okay.

• 20:55Speaker 05

  In January of 2019, Mr. Bush in his first term imposed a restriction that prevented US residents from buying Venezuelan debt or even selling it to themselves. They could sell it overseas. And so some of it was sold off. But as Tracy said in her introductory remarks, in those days, this debt was trading seven, eight, nine cents on the dollar. But as with most sovereign debt restructurings, when the debt is in the form of bonds, freely tradable bonds, you don't actually know who owns it until such time as you make an offer

• 21:40Speaker 05

  to restructure it.

• 21:41Joe Weisenthal?

  Just real quickly as a follow up, does it matter? Okay, maybe people don't have a lot of sympathy for hedge funds that are picking up distressed debt at two cents or five cents on the dollar. Or maybe people feel differently about some entity that, I don't know, is managed, just conservatively managing sovereign debt for widows and orphans, so to speak. But from the perspective of international law, or New York law, or sovereign debt restructuring law, does the composition of the creditor group bear into this at all?

• 22:12Speaker 05

  No, the claim is the claim.

• 22:15Joe Weisenthal?

  Okay.

• 22:16Speaker 05

  Where it is relevant, Joe, is in the negotiation of the debt. If I sit across from someone who paid 10 cents for their claim.

• 22:26Joe Weisenthal?

  Yeah.

• 22:27Speaker 05

  And I offer them 20 cents, I'm a hero. But if I sit across from, in the old days, a banker

• 22:35Joe Weisenthal?

  Yeah.

• 22:35Speaker 05

  who lent a hundred cents, and I offer him 20 cents, I'm a heel. And so it plays into the negotiation in that sense.

• 22:46Tracy Alloway?

  Would you expect the US Treasury to be heavily involved in these negotiations? Just in terms of the actual process, the legal process?

• 22:54Speaker 05

  Not nearly as much as George Bush's Treasury was back in 2004 and '05. The US Treasury has always had an interest since 1982, when Mexico began the modern era of sovereign debt workouts. US Treasury has always had an interest in seeing these problems dealt with in a consensual negotiated way. So I would expect, even when the time comes, they would encourage both the Venezuelan administration

• 23:32Speaker 05

  and the holders of Venezuela's debts to negotiate them in a consensual way.

• 23:40Joe Weisenthal?

  Well, actually, let me back up. I mean, we're talking about these negotiations, and the market is clearly reflecting some expectations of a change. But does the arrest, the rendition of Maduro, make that inevitable? Does this have to happen? Or is it possible that, again, because his vice president is currently

• 24:02Tracy Alloway?

  It's the same regime.

• 24:03Joe Weisenthal?

  It's the same regime, which seems to be, Trump seems to be OK with, because, for whatever reason, we can only speculate what kind of conversations they've had in the background and so forth. But is there an inevitability to these negotiations? Is there a formal starting gun? Is there a reason that they ever have to happen? Or could Venezuela just stay on default and sort of muddle through without any resolution to the debt question?

• 24:27Speaker 05

  I don't think they can stay in default indefinitely, but there is no starting gun. As a matter of fact, what has prevented a restructuring of Venezuela's debt since 2017 has been the sanctions imposed by the US government.

• 24:43Tracy Alloway?

  Oh yeah, this is funny. So you can't even sit down and begin to talk about a restructuring because you'd be in violation of sanctions.

• 24:51Speaker 05

  Yeah, and so those sanctions would have to be relaxed, and that decision ultimately sits with Mr. Trump. And he may or may not decide that the removal of Maduro is a sufficient basis on which to begin relaxing sanctions, but I don't think so. On the current path, he will want to see a complacent regime in Caracas. He has said as much. The president of Venezuela has got to be someone who follows the orders of Donald John Trump, and he's

• 25:32Speaker 05

  he's said that. If they are sufficiently complacent, then perhaps he will begin relaxing sanctions, perhaps allowing a debris structuring to go forward. What has changed and what will be different this time is if you listen to the president's speech last weekend, he didn't talk about democracy. He made a passing reference to wanting to see Venezuela made great again, but his principal focus was on the oil companies. He wants them pumping oil, and to that end,

• 26:13Speaker 05

  in effect, said, "We will make sure that your claims for expropriation, which occurred in the Chavez era, are getting paid." And if he is true to what he said back when George Bush was in Iraq, Donald Trump criticized Bush for not having taken Iraqi oil to pay for the costs of the invasion. And so I expect he will say this time that Uncle Sam is entitled to be recompensed for the cost of keeping that naval armada in the Caribbean.

• 26:53Speaker 05

  So in a restructuring, the waterfall, which is normally a squabble between the citizens of the country and the creditors of the country, in this case, there may be people at the top and maybe US government is at the very top and oil companies come next and then the squabble between citizens and creditors.

• 27:37Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices, but according to recruiters,

• 28:22Speaker 01

  advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.

• 29:00Speaker 06

  Quick question for you. How much of your day is spent typing? Email, Slack, notes, prompts to ChatGPT? Whisperflow is a voice to text app. Instead of typing, you talk and it types for you in any app on your Mac, Windows, iPhone, or Android. It takes out the ums, fixes the typos, and the result sounds like you wrote it, four times faster than typing. So the email that used to take two minutes now takes 30 seconds. Whisperflow is free. Download it at whisperflow.ai. That's W I S P R flow dot AI.

• 29:30Tracy Alloway?

  One thing I've learned in my life and job is that lawyers are nothing if not creative. So I'm wondering, is there some sort of creative solution that could at least help, perhaps on the margin, the Venezuelan debt load while, I guess, preserving the goodwill, so to speak, of investors? So I'm thinking, you know, maybe, maybe they get an extension instead of a haircut. Or maybe you have something like the Mexico situation where you have new loans, but those fall under different treatment to the older debt, something like that.

• 30:08Speaker 05

  Yeah, look, a couple of things. First, the oil infrastructure in this country has been badly degraded. It's going to take two to five years, I think, of significant investment to bring that infrastructure up to the point where Venezuela is pumping what it was pumping, say, back in 2016, maybe 3 million barrels a day. So this is not going to happen overnight that there's a huge influx of revenues. The second point. If Mr. Trump is true to his word, first dibs on those revenues will go to the oil companies

• 30:51Speaker 05

  who are making these investments. Third, some money is going to have to be used to have a discernible improvement in the lives of Venezuelan citizens. Otherwise, the regime that's in power will be very fragile.

• 31:14Speaker 05

  So you're talking about years in which most of this money is going to have to go places other than into the pockets of legacy bondholders. What I would expect, therefore, is that the bondholders will ask for what is generically called a value recovery instrument. This is a country that derives 95% of its foreign currency earnings from the sale of a commodity oil. So the logical thing would be for the bondholders to say, give us an instrument that is a play on the oil market.

• 31:54Speaker 05

  That was done, by the way, in the early 90s during the so-called Brady Initiative. You had oil exporters, Mexico, Venezuela, Nigeria, and they sweetened their Brady restructurings by giving oil warrants that would pay off if oil exceeded a certain strike price in the future. Mexico's issued in 1990 had the strike price set at the enormous level of $14 a barrel.

• 32:35Speaker 05

  But I would expect that that will be the fudge factor in a Venezuelan restructuring. You're right that most payments will have to be deferred for quite a long time, but an oil instrument is likely to be part of the mix.

• 32:51Joe Weisenthal?

  When we're talking about international law with respect to sovereign debt, what law are we actually talking about? Because I know often they talk about New York law where a lot of bonds actually get issued or they go through the banks there, whatever. So when you talk about, okay, international law says this, that, or whatever, about what corpus of law are we actually talking about here and what law is relevant to the Venezuelan debt?

• 33:15Speaker 05

  Yeah. The debt instruments themselves.

• 33:19Speaker 05

  Will be issued under the law of a municipal jurisdiction. Ninety-five percent of sovereign emerging markets sovereign debt is issued under the law of either New York or England.

• 33:31Joe Weisenthal?

  Okay.

• 33:32Speaker 05

  In Venezuela's case, it's all New York law.

• 33:36Joe Weisenthal?

  Okay.

• 33:36Speaker 05

  When I say international law, that's not the law applicable to the contract. That's really the law applicable to the governments that form part of the international

• 33:48Joe Weisenthal?

  Okay.

• 33:49Speaker 05

  system. So it will be New York law in the case of Venezuela.

• 33:55Tracy Alloway?

  But just on this note, I know there's been chatter for a long time now about creating some sort of common framework when it comes to sovereign debt restructurings. Is that at all realistic at this point in time? Or is it still sort of pie in the sky thinking?

• 34:10Speaker 05

  That idea was first broached back at the time of the Argentine default in December of 2001, and it was actually promoted by the IMF. They called it the sovereign debt restructuring mechanism. They reasoned as follows. In corporate debt workouts, under bankruptcy, municipal bankruptcy laws, if a supermajority of the creditors agree to a restructuring, their decision binds any dissenting minority.

• 34:47Joe Weisenthal?

  Right.

• 34:48Speaker 05

  Sovereigns are not subject to a bankruptcy law, and so sovereign debt workouts have been characterized by holdout creditors, that is creditors that do not join a voluntary debt restructuring and seek to pursue their legal remedies. Argentina knows all about this.

• 35:09Tracy Alloway?

  Yes, they do.

• 35:10Speaker 05

  So the IMF reasoned, well, what we need is a Chapter 11 for sovereigns. That idea died a political death because the Americans did not support it. But it continues to have some vitality, and bills have been introduced over the last

• 35:35Speaker 05

  Few years into the New York legislature, one of them suggesting that perhaps New York, whose law governs many of these debt instruments, should itself put in place a kind of Chapter 11 process. It hasn't gotten much traction. I don't think that that will.

• 35:55Tracy Alloway?

  Why not?

• 35:57Speaker 05

  Ah, for a bunch of reasons. There are aspects of sovereign debt workouts that differ materially from corporate debt workouts. Among other things, the court does not control the foreign sovereign.

• 36:14Tracy Alloway?

  Oh, of course, yeah.

• 36:16Speaker 05

  Foreign sovereign, we're going to liquidate you.

• 36:19Tracy Alloway?

  We're going to take the keys to, well, I mean, keys to Venezuela, kind of doing it.

• 36:23Speaker 05

  Exactly. They can't say, we're going to replace the management. Sovereigns are sovereign. And that has always been the principal feature of sovereign debt workouts is that you're dealing with debtors who are not subject to any institutionalized bankruptcy regime. Therefore, we've had to rely on consensual workouts. But I'm not going to put too fine a point on the word consensual. Sometimes there's been encouragement.

• 37:00Tracy Alloway?

  All right, we're going to have to leave it there. But it's been so good to catch up with you. Really, the perfect guest for this particular topic. So thank you so much.

• 37:09Speaker 05

  Okay, guys. Thank you. Thanks, Lee. That was fantastic.

• 37:12Tracy Alloway?

  So good. Thank you, Lee.

• 37:13Speaker 05

  Bye bye.

• 37:27Tracy Alloway?

  Joe, I really enjoyed that conversation. Lee has an incredible talent for explaining things in very, very clear language. But, you know, the thing that stuck out to me is, I guess, the contrast between sovereign versus corporate debt.

• 37:40Speaker 05

  Yeah.

• 37:41Tracy Alloway?

  You know, he talked about it at the end, this idea that you can't really have a sort of standardized bankruptcy process for a sovereign as you do with a corporate because. Sovereigns are sovereign.

• 37:52Joe Weisenthal?

  You can't have like a new equity. It's like, oh, and now the, and now the country goes to the equity holders, right? Because that's what happens in a company, right? So it's like, oh, all the, you know what? Oh, the debtors get a haircut and there's a new, they become equity holders, right? The debtors, what, what would that even mean in the sovereign concept? For the debtors to become equity holders, except to some extent, to his point, which I thought was interesting, it was like, okay, you could have an oil-linked instrument, but not every country that gets in trouble is going to have like a very easily saleable commodity such as oil.

• 38:24Tracy Alloway?

  Yeah. And also just, I talked about this in the intro, but the idea of debt is a human construct.

• 38:31Joe Weisenthal?

  Yeah.

• 38:31Tracy Alloway?

  Like, it doesn't actually exist, except in our minds. And so.

• 38:35Joe Weisenthal?

  And on the pages of the terminal.

• 38:37Tracy Alloway?

  And on the pages of the terminal, of course. So it can change over time and there are all these values embedded in it.

• 38:43Joe Weisenthal?

  Yeah.

• 38:44Tracy Alloway?

  And one man's legitimate regime is another man's or another investor's dictatorship. And it seems very hard to litigate that in a public court.

• 38:53Joe Weisenthal?

  Totally. How you define odious? How do you define an odious regime? How do you define what are appropriate proceeds and inappropriate proceeds? Clearly extremely difficult. And of course, sure, maybe the US government right now will say Maduro, narcoterrorists, et cetera. But that is just the perspective of the Department of Justice, which has, which has filed charges against Maduro. Whether, whether that's some objective reality, difficult. By the way, I love that episode. I would have rather not asked any questions and just listened to Lee talk.

• 39:27Tracy Alloway?

  Oh, he has the perfect radio voice. We're going to get him to narrate something, I think. Now that he's retired, he has some time, he can narrate our next long form episode.

• 39:38Joe Weisenthal?

  Yeah, maybe we should do like a three-part series on sovereign debt that just be.

• 39:42Tracy Alloway?

  Just have Lee tell stories about, you know, being across the table from various creditors.

• 39:48Joe Weisenthal?

  I love that. Representing various failed governments or post failed governments or unsavory. Yes, that sounds great.

• 39:56Tracy Alloway?

  All right. Shall we leave it there?

• 39:58Joe Weisenthal?

  Let's leave it there.

• 39:58Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 40:04Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez at Carmen Armit, Dash O'Bonnet at Dashbot, and Cale Brooks at CaleBrooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where the daily newsletter and all of our episodes, and you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 40:25Tracy Alloway?

  And if you enjoy Odd Lots, if you want us to have Lee come back and talk for three hours by himself, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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