Thursday, May 22, 2014

Lee Buchheit and Sovereign Debt

Frantically busy. But went on Mon to lecture by Lee Buchheit to launch Soverign Debt Management which Rosa Lastra and he have edited.

The reason was that my occasional collaborator Marcus Miller has produced another playlet, Volpone: or The biter bitten about sovereign debt restructuring and I've put it in metrical form. It will be performed at a conference in Glasgow and this was a chance to present it to him.

Scene One: Arcadia in dire straits
Lee seems to be a great guy and clearly the doyen of his profession ("the Philosopher King of sovereign debt restructuring" according to the Wall Street Journal).  His lecture was about Sovereign Debt Sub Specie Aeternitatis (which is also the title of the closing chapter of the book) in which he rather surprised many members of the audience by suggesting that most of the government borrowing in the developed world was simply immoral - politicians piling debt on future generations for no good reason because they won't take tough decisions now. Amongst the many interesting points he made:
  • Piling on debt in good times severely dents a country's capacity to borrow on reasonable terms when they really need the money for some emergency.
  • The practice of having bonds repayable at a given end date seriously destabilizes the debt market because instead of having to take a view on whether a debtor will be able to repay the loan the creditor has to decide whether on a given date the debtor will be able to re-finance and this will depend on market sentiment. In former times government bonds were repaid in installments over the life of the bond and this is much better - but harder for the traders to price.
I bought a copy of the book and although this is not my field at all it is beautifully written. Let me give a flavour from an extract from Chapter One by Lee and his colleague Elena Daily
Documentation improvements will have no immediate basis point cost to the sovereign at the time of the restructuring; that is their charm. Their significance (and cost) may become apparent down the road.... Any feature that makes those instruments more difficult to restructure in the future...may then be regretted, but for politicians....the operative words in this description are 'down the road' and 'in the future'.
Sovereigns are sometimes advised to blend a drop or two of honey into the restructuring medicine...The problem, as always in these affairs, will be money. The sovereign must either raise the funds required...by suspending payments on existing loans from the very same creditors who will be receiving the sweetener...or borrow the money from an official senior source. The former smacks of pilfering someone's car keys and then offering to give them back to the owner in exchange for a ride to town. The latter requires a broad-minded and indulgent official sector lender prepared to use its taxpayers' money to raise the saccharine content of a settlement with private sector lenders.
 Delicious writing!

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