September 03, 2014

When discussing sovereign debt restructuring, let us begin with the beguine

Sir I refer to Martin Wolf’s “Holdouts give vultures a bad name” September 3.

Without opining on the sovereign debt problems of any particular country (like in this case Argentina’s) I have often said we need more clarity in the terms we use.

For instance any sovereign debt holder who acquired the debt at moments when it paid low risk premiums, and the debtor country seemed to be going in the right direction with sustainable debt, should be classified as a bona fide sovereign creditor.

On the opposite side, any debt holder who acquired the debt at moments when it was paying high-risk premiums, because the debtor country was deemed to be going in the wrong direction, towards unsustainable debt, should be classified as a speculative sovereign creditor.

And there are no clearer frontiers between those two categories, than the implicit risk premiums at the moment of investing in that debt… for example 400 basis points over the lowest rate paid by sovereigns for similar debt.

And I believe that, if a country needs to renegotiate its debts, the speculative holders should not expect to have the cake and eat it too, meaning collecting high risk premiums and full capital. For instance, any interests collected over a certain base risk premium defined, should first be deducted from principal owed, in order to allow for some justice with respect to the bona-fide creditors.

The above is not intended as a fully thought out solution, especially when we know that many speculative debt holders could dress up their positions as bona-fide, but at least it also helps to remind us that, both among hold-outs and restructured there could be good and not so good creditors.

But I say all this because just as important, or even more important than any restructuring of sovereign debt, is to send the right signal about when these debts were originated… as so much of renegotiated sovereign debts should never have really come into existence.

I believe us citizens who suffer bad governments, can always benefit from new tools that put some dampers on their possibilities to contract debt, usually only to benefit some few, and to be paid by future generations. Where would for instance the debt-squandered-away levels be for many countries where it not for holdouts?

And so, when discussing sovereign debt restructuring mechanism, we should begin with the beguine. 

For example any debt restructuring for a sovereign debtor who is in problems for causes mostly of his own making, should include clear mechanisms which at least shows an intention of that not happening again. By the way, that is most often an integral part of any private sector debt rescheduling, for instance maximum debt levels, minimum cash reserves and so on. 

A sovereign creditor who just plays out the card of “take your hit and leave me alone” might very well merit some bad vulture holdouts, I mean for the benefit of us tax paying citizens.

PS. Beside sovereign credit risk ratings, should we not also have sovereign governability and ethic ratings?

PS. And, in all these matters, let us never forget that what might appear as a benefit to some, might very well reappear somewhere down the line as a cost to another.