Odd Lots - How Iraq Pulled Off One Of The Biggest Sovereign Debt Restructurings Of All Time

Episode Date: March 2, 2020

There are lots of famous debt crises in history, but the story of Iraq's government debt build-up in the 1980s and subsequent restructuring in the early 2000s is probably one of the most unusual. Iraq transformed from a net creditor to a net borrower in a single decade, tapping a bunch of unusual sources (including funds linked to the CIA) for money to finance war against Iran. All that borrowing eventually culminated in one of the biggest debt restructurings in history. On this episode of the Odd Lots podcast, we speak to Simon Hinrichsen, a doctoral candidate at the London School of Economics, and the first to trace the build-up of Iraq's debt going back to 1979. He walks us through lessons learned from the Iraq restructuring – including one big missed opportunity in the world of sovereign debt.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But on Vanguard, at Vanguard, institutional quality isn't a tagline. It's a big line. It's a very big. It's a few. commitment to your clients. We're talking top grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com

slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing Corporation Distributor. Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, we like to talk about debt, don't we? We do. Remember we did last fall, we had our Odd Lots live performance, I guess, or live

episode, and we had a whole section all about the nature of debt, sovereign debt, sovereign debt restructuring, things like that, definitely one of our go-to topics. Yes. And one of the reasons why I find debt quite fascinating, and you sort of touched on it just there, is because there's almost like a moral veneer on debt. Like the issue of who owes what and to whom is almost a moral one. I've totally noticed this, and I totally agree. I mean, there was a story that I tweeted out from Bloomberg a couple weeks ago about how, you know, Stubhub, it's where you could buy tickets for like concerts and sports games and stuff. And they had this thing on there. They were like partnering with some companies so that if tickets were too expensive

for you, you could borrow money to buy them. And people just have such a visceral reaction. They're like, oh, this is terrible. This is outrageous. And like, I guess kind of, but it's so interesting, like nothing makes people more upset in the financial sphere. then the perception that someone is taking out debt in an unsustainable or way or for a reason that doesn't make total sense, like maybe like buying a house or something. They just get people have such strong views on debt. Totally. It's a hot button topic. And this is one of the reasons why debt restructurings are so fascinating because it's just one giant argument over how to work out the debt and whether the country that assumed all that debt deserves to get away with it as a lot of people. people think. But there is one particular notion of debt that is even more interesting from a moral perspective than all others. Do you know what it is? Tell me what it is. Odious debt.

Ah. So this is, well, define odious debt, because I've seen this for a long time, but I'm not sure if I actually know the proper definition. Okay. Well, it's something that has been mentioned on our podcast, I think a couple times before now, but we've never really gone. into it in detail. But the first thing to know about odious debt is it's a concept that really only exists in the minds of lawyers and academics. It doesn't really exist in the real world. But what it is, as a concept, is the notion that if a government issued a bunch of debt and the government did that without the consent of the people and did it without actually benefiting the people, then the new government shouldn't necessarily be responsible for that debt. And you can imagine that the scenario where that

would most likely apply is something like where you have a dictator or a despot that takes a bunch of debt and uses it to terrorize his or her population. And then eventually, you know, they get overthrown. There's a new government should the people that suffered under the previous regime have to pay back the debt that the dictator actually borrowed. Right. It's a great question. And of course, incredibly complicated and automatically, you could imagine that the question of whether debtors, debt is odious or not would be very subjective and open to interpretation. But fundamentally, paying off a past debt involves an imposition on real resources of a country that's less money that can go to domestic needs, social services, rebuilding after a war, things like that.

So while on the one hand, you might say a nation's debt is a nation's debt, the question about what is realistic to impose on the new population, on the new government in terms of damages and obligation to pay, there's a major moral dimension. Absolutely. And I mentioned at the beginning of that definition that odious debt is really just an idea. It doesn't exist in the real world. But what we're going to talk about today is the close. We're the closest we ever got to odious debt actually being enacted as some sort of legal precedent.

The world did get very close to it, and we're going to find out exactly how close and why it didn't really materialize as a concept. And we're going to do it through what was really one of the most interesting debt restructurings of all time. Great. I can't wait for this one. All right. So I'm really happy to say our guest for this episode is a previous Oddlots guest. Simon Hinrickson, a PhD student at the London School of Economics, has written a fantastic paper about Iraq's debt restructuring, and he's going to walk us through it. Simon, it's great to have you on. So, Simon, first of all, it is really a fantastic paper, and it's available on the LSC website,

so everyone can go and read it hopefully after the podcast. but it's really fascinating because it's almost like people don't remember this chapter of Iraq's history, I guess because it gets superseded so much by multiple wars and, you know, a lot of terrible things happening within its borders. But at one point, Iraq was the most indebted country in the world. Correct. At the eve of the U.S. invasion in 2003, Iraq was so indebted, that it had more than five times his GDP in national debt. Now, this story is very long and has a bunch of different interesting topics, everything from, as you mentioned, odious debts where it was fairly close to being enshrined in the

doctrine of international law. It had some powerful backers. But it also has all the things that make for a fascinating financial story. So one is that you didn't really know who actually was owed a lot of the debt. Some of the debt was political. Some of the debt was owed through a variety of shady or illegal holdings. It included various national intelligence agencies and goes all the way back to the early 1980s. So it's sort of a plethora of things coming together in what I would argue is probably one of the few successful things

that happen in Iraq in the post-invasion reconstruction, which is why it sort of often gets overlooked because so many other disastrous and terrible things happen, whereas this sort of flew under the radar. So before we obviously get to any talk of how it was restructured, let's talk about how the debt was incurred. As you point out in your paper, in 1979, it's still that point due to the countries, tremendous oil reserves and so forth. It was actually a net creditor to the rest of the world, so it didn't have any net sovereign debt. And then, as you point out later, the debt on the eve of the invasion was several multiples of its GDP. How did the debt start to get built up?

And who are the original lenders to it? And why did they need this debt? Yeah, so if we go back to the 1970s, this is really where at least some of the current political discussions and wars originate? So it was a time in which economic growth was actually fairly robust. Iraq came out of the 1970s with double-digit growth rates after the nationalization of the Iraqi Petroleum Company. you had oil which set new highs in terms of price. And Iraq came out in 1979 and was a net creditor to the world. So their foreign exchange research was somewhere around $35 billion, which is almost two-thirds of his GDP. And in that context, that Saddam Hussein takes over and starts his multi-decade reign.

So it actually starts from a position of being a net creditor to the world, obviously in the geopolitics, political sphere. This is also a time when the rest of the Middle East undergoes tremendous change. The 1979 Iran Revolution, which ends up with the Tehran hostage crisis of the U.S. Embassy, means that Iran is not favorably seen as by the Dham starts this conflict in a sense in which he has backing from almost all of the geopolitical world, anything from the Soviets to the U.S. to Europe. And it's really in the context of the eight-year war between Iran and Iraq that the entire debt is raised or funded. All of the debt is political war debt and comes from a couple of different sources, which can all sort of be described as political backing for Iraq's war. So you have, if we try to break it down into three

buckets. You have the rest of the Middle East, the GCC country, the Gulf countries who provide backing to Iraq because they favor Iraq. They don't want Iran to become the Middle Eastern hegemon. And some of these loans or grants are given to simply just have Iraq by weapons import for the war. Now, the grants or loans and the reason I'm not just calling them loans is that Iraq consider these things grants. At the time, they don't think they're loaned. They just think they're to help them back, whereas the rest of the countries, especially Saudi and Kuwait, consider them loans. And there is going to be a debate about that later.

The other one is other governments, what we today would call OECD and ends up being restructured in the Paris Club, which is the U.S. or Europe. They both send direct money. They also sent personnel and weapons to help Iraq fight the war. And then there is the murky, unknown loans that are sort of shrouded in mystery, which we don't really know what comes from. So the best example is a loan that was given from B&L. B&L at the time of the 1980s was an Italian-owned state bank, and it gave almost $2 billion in loans to Iraq through a small branch in Atlanta.

Now, why would an Italian bank, state-owned bank, give big loans to Iraq through its Atlanta branch? Well, the loans were underwritten by the Department of Agriculture. And in the 1990s, it turned out that the Department of Agriculture Corporation, those loan subsidies were actually heavily influenced by the CIA. There's a long story about that, ended up being called Iraqgate at the time in the 1990s. But all of these loans, whether they were officially sanctioned or they came sort of by way of corporate, quasi-government loans, all of it means that Iraq ends up taking on enormous debt in the 1980s and actually goes from being a net creditor to having a debt-to-GDP ratio of over 250%. At the same time, obviously, it goes to being a war economy. And the numerator and the denominator both going the opposite direction.

So Iraq, from having double-digit growth in the 70s, end up having negative growth all through the 80s and uses all of its money on the war effort. So it's in that context that it goes from being a big net creditor to being a very, very indebted country. So Iraq basically has the goodwill of numerous actors in the Middle East, as well as international actors like the U.S., like the UK, and it's basically fighting a proxy war against Iran. And these countries and actors are willing to fund it. And that starts the cycle of debt accumulation. But then at the end of the war, its economy is also suffering. And so growth is slowing. And the debt to GDP ratio really starts to explode at that point.

But of course, it still has political goodwill on its side. But then, Simon, you wrote that something quite big changes. And that's the point at which the debt actually. becomes a problem, what was that trigger point? After the Iran-Iraq war, or really by the time of the end of it, the geopolitical landscape changes. One is obviously that the Soviet loses some of its influence in the world. Another is that Iraq overplays its hand. So it is victorious militarily, but it ends up being in the end in the geopolitical sense. And even then, Saddam, after the war,

war thinks that he has the power to actually be the new big hegemon in the Middle East. So he starts to be more aggressive. Some of the loans that he considered grants from Kuwait, there is a dispute about that in the late 80s, and he uses it as a pretext to invade Kuwait, which ends up being the first Gulf war. At this point, nobody is really on Iraq side anymore. the geopolitical support that was massive because nobody liked Iran after the hostage crisis has completely reparated.

And not only that, everyone is afraid that after Kuwait, Iraq is going into Saudi Arabia, which is heavily supported by the West. So Iraq is defeated. And instead of actually being able to service these loans because they can just keep getting money from its backers, it ends up starting to default because the interest payment start to add up, it needs to have more money for infrastructure. The reconstruction effort is massive after the Iran-Iraq War, and oil exports sort of goes down quite dramatically.

So it's in that context that after the first Gulf War, the world comes together to sanction Saddam and put on not only sanctions, but also war reparations. You have big liabilities that instead of having the opportunity to roll over because it's easy to issue new debt, all of a sudden the geopolitical wind of change means that they need to raise the money by themselves, and there is no way that having a debt-to-GDP ratio of over 300% of which interest rate payment is quite high, the oil exports that they used to actually service the debt goes down

because it becomes harder to do trade, and they are hit with sanctions. reparations payments, which means that at this point, the default, and by the time that the official sanctions from the UN isolates Iraq from the global economy, default is complete, and Iraq sort of stops any payments and withdraws from the global economy. So before we go further, at this point, you know, obviously in recent years, we've seen sovereign debt restructurings and we've seen different players, you know, have different interests. including the prominent role that hedge funds or other private lenders have played and trying to make sure they get paid. At this point, is there much private ownership of Iraqi sovereign debt?

Is it in private hands or is it largely different states and the CIA-backed debt and sort of political debt, as you called it? In 1991, which is really the height of indebtedness, the total. liabilities, or if we start with total debt, you have $18 billion, which is direct debt to OECD-like countries, meaning the West and the U.S. Then you have $50 billion, which is to Gulf states. These are the grants for the loans of which nobody can really agree on what they are. Then there are a bunch of smaller creditors, which are also countries. And then $10 billion, which is commercial debt, which is this sort of quasi-bilateral. You don't really know who it is.

But in the sources at the time, the commercial debt also includes a wide variety of trade credits or export credits. This can be loans that small businessmen gave to liens on. And they are small, but they will obviously grow over time. But the main money owed here are to bilateral states, whether that being OECD or a Gulf country. And there aren't really any hedge funds involved at the time. This was way before people started talking about restructuring in terms of

Bolter funds or anything like Argentina. So it was primarily word that that was highly political. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients.

We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio. That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Simon, you say in the paper that you constructed, I think it's the first chart of Iraq's debt to GDP ratio going all the way back to 1979. Is that right? Correct. How did you actually go about doing the research for how much Iraq owed at these various points in time?

Because as you point out, it's sort of a tangled web of obligations that they're weaving, right? You have everything from sovereign creditors like the United States to a guy that, you know, imported a bunch of frozen chickens into Basra and wants to get paid. So how did you actually go about accumulating all that data? One of the things when you do a restructuring is that normally you know who is actually owed the money. So in most sovereign restructurings, the main issue is external debt, which is bonds held at either Europleo or DCCC. So you actually know who owns the bonds and you can get them together and make an offer or start negotiations. In Iraq, all of the debt was incurred before 1990, which means that they were all loans.

they had been delinquent on for a long time. And Iraq had been isolated and under severe bombardment by 2003. So it's actually kind of hard to find out who's actually owed a lot of money. So one of the first things that the IMF and the Treasury did when they came in was to try and get a sense of who's actually owed all this money. And I start from taking all of and say how much was actually restructured in 2007. six. So let's assume that you are owed something. Obviously, you want to get paid. The way to get paid is during the restructuring, you come forward and tell them, I am owed X and Y, and then we can work our way backwards from there. So I take the approach to start from there and then work my way backwards

to try and find out where are these loans actually placed in time. And there's an incorrect sign. So obviously some of the bigger loans we know which were, where they were from, it's usually year when it's corporates or commercial loans because oftentimes there are contracts. But if it's handshake deals, which sometimes they are, it's a little bit hard. So what I did was to take all the nominal amounts that were restructured and then work my way backwards to try and place them in time and then see where do they originate, where can we place them, and all of the loans really are coming from the time during the IRA and Iraq wall. There's a matter of trying to place them and then find out what would the money.

their original loan amounts, how much were they owed after, what would the interest rates, and then try to discount forward. And you describe your work in the paper as having done an oral history of this, because, again, it's so complicated. So what was your process? Who did you go out and talk to to actually sort of reconstruct the whole process? Yeah, so that was one trying to find out the debt history of Iraq, because there was really no one who had done a comprehensive study covering all the time from 1979 to 2003.

There were some bits pieces here. Obviously, I borrow from some of the great work that's been done before. But getting to the debt history up until 2003 only got me so far. The second part was to actually look at the restructuring. So the oral history is that I went out and I talked to everyone who were actually involved. So this would be the lawyers, this would be the bankers, the officials who were involved for the UK, the US governments who actually conducted the negotiations. And then a lot of primary sources. So you have all of the press releases, you have all the negotiation papers, you have all of the restructured and reconciliation documents that you can go see.

So a lot of the loans that I found and traced back were actually from documents that were given during the restructuring so that they could get paid. and then try to work backwards who were the banks, so the B&L, for example, the CIA-linked loan from the 1980s was restructured in 2006 as part of, by that time, B&P Paribar's claim on Iraq, which had just been non-performing loans on its book for almost 20 years. Well, let's talk about the restructuring then, because we've been building up to that point. So I guess in the early 2000s, everyone certainly remembers what happened with the U.S. invading Iraq. And after that, the restructuring really begins in 2003. So how does that process kick off and what were the motivations of actually doing the restructuring?

There are a few differing accounts on what the motivations actually were. Now, I would put them broadly in two categories. One was moral or political, and they're sorted together, in that it was part of the reconstruction program where the U.S.-led coalition would like to get Iraq rebuilt. Obviously, there was a big debt overhang, and the government at the time was heavily favoring market forces, and they wanted Iraq to be part of the global economy again. It's a lot easier if you don't have a lot of outstanding credits that can be attached by various creditors at any time. So they wanted to clear it up so that Iraq could regain entry.

That is sort of the political part. The second part was more moral in the sense that this was, they had liberated, Bush and Cheney had liberated Saddam and Iraq from Saddam. and they should not be carried over. So this is where the odious dead part comes in. There are differing accounts as to how big a factor this actually was at the time. And I will say that depending on who you talk to, some people say that it wasn't important at all. And some people will say that it was very important.

There were several official statements. So the Treasury Secretary did say that they considered declaring that odious, but they wanted it for both moral and political reasons. So what did they actually do? Well, if we take our mind back to 2003 when they actually tried to make the invasion legal, the first UN resolution actually had very important provision in for the debt restructuring, which was that it immunized all of Iraq-heed the assets from credit to attachment. This is fairly big and not something that's normally done in sovereign debt restructuring.

And it's important because Iraq had lots of oil assets, were abroad. And if all of a sudden creditors started to come out of the woodwork and say, we want to get paid on our money, on our debt, then they could start to attach these oil assets. So it was enshrined into UN law that Iraqi assets were immunized from credit to attachment, which was sort of the step one and was part of the discussions from even before the invasion. Now, after that, it got a pretty big push from the economy. part of the invasion force. So the CPA, the provisional government that the U.S., that the coalition set up, had an

economic office of which it had a couple of big projects of which debt restructuring was one of the main ones. So it was from early on agreed that there would be a debt restructuring. And you can see if you go back, Bush, the Treasury Snow. They all talk about this is a priority in the reconstruction of. of Iraq. Okay, so we have the UN statement immunizing domestic energy assets from being seized by creditors. We have the rhetoric about wanting some sort of restructuring and some talking about how this debt should be seen as odious and therefore canceled. What was the gap, if any,

between the rhetoric that we heard from the Bush administration versus what actually got put into practice in terms of the restructuring, and where did things break down in that respect? I don't know if they really broke down, but they started early, they started early on to talk about how do we actually want to do this restructuring. So there are a couple of different ways you can go about a restructuring. Obviously, Iraq had three big, one was the Paris Club people. These are the OECD, the developed countries who are owed money directly. A lot of negotiations start there. Then there was the commercial creditors, which were owed money, and then the bilateral governments, which are all the non-Paris club, which mainly means in this instance, the Gulf

states in China. And the U.S. had enormous political put behind pushing for a deal, especially at the Paris Club. So this is where they started. And they went to the Paris Club saying that we want as much debt right down as is possible. And this is where it, the context about the time of negotiations is important. So it varies enormously how big haircut government credits is actually take on their summer debt. So we have stories about as low as less than 20% haircut as was the case in Uruguay to almost 80, which is the case of the Argentinian restructuring in 2005. Obviously there were things happening after that, but just in terms of the haircut that creditors take,

it was actually during the time, more creditors-friendly restructurings that were the norm. Obviously, going out and saying, we would like your debt to be restructured at somewhere around 80 to 90% haircut, was a pretty big ask at a time when creditors actually had a lot of power to say that. So the initial talk is, where do we actually go about during the restructurings and how can we use the political muscle to,

push it through. This is where you have the two groups of people who are normally involved in restructurance. So, this would be the IMF and the US treasuries and the bankers and the lawyers of the world who want to do a normal restructuring

where you do either a debt for debt swap or a debt for cash swap. You do it through the normal channels of negotiations. Or you had the non-standard players, so the White House, the Pentagon, all of the grassroots organizations

who say, you know what, all this debt that Iraq has, we want you to declare it odious because it is not moral to pay it at all. The debt was not for the people. It had no benefit. It was for the personal enrichment of Saddam Hussein, and it was really used for a political war

in which the citizens of Iraq didn't really play a big role. So it's the clash of those two. and both of them came out in the same way in the sense that they wanted the debt right down to be big. But whether you go through a normal restructuring process or whether you declare the dead odious have two very different outcomes. So there is this internal battle between the groups and, as you might have guessed, the IMF and the treasuries

and the people who are actually involved ends up being on top. And the reason is that they convince everyone else that, one, this is how debt restructuring should work. We don't really want to open the can of worms of starting to declare sovereign debt odious. And we can get a big write-down anyway. So they went out and said, you know what, we can probably get 90% haircut. We think that it's not needed to be declared odious. And in the end, the opening gambit from the coalition side at the Paris Club, which is where

sovereign debt negotiations are negotiated at the Paris Treasury, the French Treasury in Paris. Our opening gambit is that we're going to say we can get 95% haircut. Obviously, it ended up a little bit lower, but the U.S. and the UK went pretty hard and said, you know what, we can do it the normal way and we can get where you want us to be. The other side of that was mostly the Europeans, so the Russian and the German and the French. who thought that 95% haircut was actually a little bit excessive. They thought 50% is better. And the U.S. was not really a big creditor.

So while they had political muscle, they didn't really have much debt. They only had $4 billion. And they end up doing it in the, it takes many months, negotiation back and forth. It ends up being agreed at a summit in Chile between Putin and Bush, where personally push Putin at three separate meetings at the margins of the summit. to actually get a deal. And the deal they get is fairly harsh on creditors. So they end up with 80% haircut, which comes in three trenches,

and they do it in a way that's not actually normal for the Paris Club. So there is this idea about flow treatment and stock reduction. So normally you take the flow treatment first. Now, this wasn't really an issue for Iraq, because they didn't really pay interest on the loans, but you don't really write down the debt until all of the conditions are met. The 80% debt reduction came 30% up front, and then the IMF got involved over two times to actually help provide a debt sustainability analysis,

which by the Europeans at the time, were considered a work of fiction because it underscored how much revenue would come from oil, and it was a rigid assumption that didn't change at all. But they ended up taking a net person value reduction on all of the debt of just under 90%, which by the time is far higher than any other sovereign debt restructuring in the last 20 years. Okay, so a haircut of about 90%. How replicable would such a debt restructuring be again? Because it seems like this one's fairly unusual in the sense that you had the UN, which somehow

was able to immunize or protect Iraq's biggest assets, which were tied to its oil industry. And then you also had this big player, this big influential player in the form of the U.S. actively lobbying for the best possible terms for Iraq. And I should just mention also you had one of the best debt restructuring lawyers around and also a previous Othlott's guest, Lee Bukhite over at Cleary Gottlieb, or formerly of Cleary Gottlieb representing Iraq. So all these great things going for Iraq when it comes to this debt restructuring. So is it just an isolated incident of one of these things going right for once? I think it's an isolated incident in the sense that at the Paris Club, they had the political

backing of a coalition, which were all on the same side, and mostly represented the big creditors. they had the UN resolution, which meant that it was really hard for the creditors to do anything. There were no remedies to actually enforce the debt. And this was not only the sovereign debt, but Iraq during the sanctions period had sort of the polity of Iraq had morphed into everything being under the state. So it wasn't just the state liabilities that were being restructured. it was also the quasi-bank, the quasi-governmental organization, so such as the big banks. And the UN resolution really stopped anyone from trying to enforce their credits of rights,

which meant that a lot of people didn't engage. So whereas in Argentina, you have hedge funds like Elliot coming in, seeing that we can make a good argument that we should be paid more than the restructuring offer because there were no remedies for creditors to actually force Iraq to pay, they didn't really engage, which meant that it is unique in the sense that it was very easy to actually get everyone to pay. So after the Paris Club negotiations were conducted, the commercial restructuring was a little bit easier in the sense that there was a comparability of treatment clause in the Paris Club, meaning that no other creditors could get a better deal,

which meant that you could go out to everyone and say, if you are owed money, this is the best deal that you're going to get. And if you don't take it, you can try and sue us immunization agreement at the UN, which means that you're probably going to have to wait 15 years to have a chance, and by that time, who knows? and it would cost a lot of lawyers and it would cost a lot of weighting, whereas we can give you 10% on your notional and then also pay accrued interest on any loans,

which is not substantial. So they ended up paying LIBOR plus 75 basis point from the time of the sanctions in the 1990, which, you know, accrues at a pace. They got everyone to agree. Really 96% of four creditors took the deal. And there were no one who really stood out and tried to say, we don't want it, we're going to sue, we're not going to engage. The people who were really unhappy were, on the other hand, people who thought that this is a missed opportunity in the sense that we could have done the odious debts to use the political power behind this particular restructuring to say, you know what, we are going to try and enshrine it in international law.

and it is not moral that they are paid at all because this was not money that really was owed in good faith. So talk about that. What would have been in, say, some alternate history? What might have been the ramifications? You mentioned the Pandora's box if they had enshrined this concept that some debt is inherently odious and it's not necessarily moral to pay it back. Had that concept been put into application with Iraqi debt restructuring, what might that have meant subsequently for subsequent restructuring? I think it really would be in the sense that we don't know. But there were fairly serious to the top of the U.S. government about actually starting to do this. So if you go back at the time, the think tank and policy world, among them, academic, there is a big discussion about actually declaring the debt odious, and there are overtures in that

direction. And it would have meant that other people lending money to desperts around the world would have had to think twice and not just say, oh, you know what? The idea of sovereign debt is that the intergenerational loans of one government is honored by the next government, which is really one of the main foundations of finance at the time. you would have to step back and say, okay, so if you lend money to a desperate or a dictator, the international law is, there might be an argument that you should not get your money back. Obviously, there are lots of people with interest in one way or the other.

So, you know, it's hard for me to say what would actually happen. But I think it could have been one of the few instances of which you would have had a chance because the powers of B were so uniformly behind Iraq and getting proper debt relief at the time. They were able to create a new plug, the Ebian approach, which was a way to not take the standard template of debt restructuring,

but actually, say, for highly embedded low-income countries, we can do a special way of actually looking at what do they need. You had US who ended up writing off all of the debts so they wrote off everything after the restructuring. And there was the UN resolution. So all of it comes together to say this was a very, this was a unique restructuring in that the creditors were just immensely successful and actually riding it off and ending with a clean slate.

But under the terms of the old sovereign debt restructuring. So it was successful if we say, okay, compare it to every other. restructuring that's been in the last 100 years. And it went very smoothly. Everyone agreed. No one sued. But it could have been more. It could have been a way to actually create a new restructuring mechanism or a bankruptcy court to settle these things going forward. And it was a unique opportunity in that sense. Is it weird that, I mean, a lot of this debt, as your paper points out, was incurred in the 1980s when Iraq was fighting against Iran with the support of a lot of its creditors who were actually giving it money in order to do this.

And then, I guess, 20 years later, those same creditors are suddenly talking about that debt as odious debt. Is it weird to see that sort of progression in the way people were thinking about that money? I think it's a little bit like geopolitics. You know, people used to be your enemies. They're now your friends. And then they can become enemies. and a lot of the money was really thrown after Iraq because there was plenty to go around. And the whole idea about supporting satellite states or a few proxy wars in the Middle East was just fairly normal. And I mean, to an extent, many of the issues that we have here that are, you know, shown, especially in the early years, are still with us. So, you know, are in the news today.

a lot of the issues were not really resolved in any way. The old debt was restructured into new debt, but the underlying political and religious and power struggles really discontinued. So in that sense, probably not. So one of the questions that always arises when you have a sovereign debt restructuring and particularly in more contentious ones

where you have some creditor trying to get money is like, well, in the end, like, how do you really get a government to pay money, their sovereign country, they could do whatever they want. International law is sort of a weak, nebulous concept at best. In many cases, though, like say what we've seen with Argentina is that the money is raised initially or the bonds are sold through major financial centers.

So maybe through New York or through London. It doesn't sound like that was the case in Iraq where a lot of this debt. was just incurred bilaterally through different states or the CIA or whoever. But talk to us about the difference interrestructuring when the, if the debt was incurred through some major financial center with a sort of more robust legal framework for settling this stuff. Yeah, so one of the main difference between owing money to a sovereign versus to a corporation is that if you owe money to a corporation or a household, there is a bankruptcy court. take them to court, you have remedies, you know, there is a way to actually get the money.

Whereas sovereign states, it doesn't really work like that. In the last 200 years, or really before that, the idea that you sent in the gunboats was that you sometimes just had to force people to pay, and there really isn't a way to, it hasn't been. So why do sovereigns pay interest undead? Well, it really comes down to mainly one or two things. One is, reputation. And by reputation, I mean, it's nice to be able to smooth your consumption or borrow money if you need to buy something. And if you credit us, well, the chance that they're going to lend you money next time is probably just do it out of self-interest because it's a lot easier to pay the interest on your debt, knowing that you can go to the market again. So this is sort of

the reputational idea. Secondary sanctions, so historical analogy would be that you're put in debt of prison, but you could also just be forced. So in the 1980s, it was just a matter of raw power often, where one country forced another one to pay. All this really changed in the last, shall we say, 30, 40 years with the rise of financial centers. So in New York, in Hong Kong, in London, most money flow through one way or the other. So if all of a sudden the laws of London or English law or New York law suggests that if your money touches New York, you have to abide by certain rules, which means that you can have cases like Argentina where even though none of the creditors or the debtor were really in New York, the judge in the case sat in New York

and could really say, yes, but all money flows through here at some point. And I'm going to slap motions on it if it does, which means that the creditors do have certain remedies. to all of a sudden force countries to pay. Obviously, they were circumvented in Iraq, which makes this unique compared to some of the more different cases that we have and makes it maybe not a good template, but at least good inspiration for some of the cases that we will be, I think, going forward shortly.

So two obvious countries that have issues sort of similar. It's one Venezuela, which is obviously insolvent and has lots of assets abroad, oil assets. both in the U.S. direct with their oil company, find a way to restructure their debt and make sure that they don't end up having the same issues. The other one is Lebanon, which has a lot of debt, which is both foreign and domestic, and they have a dollar-peg currency. I know you had Paul McNamara on to talk about Lebanon a couple of weeks a month ago, suggesting all the various issues. And they come from the same idea that you need to find a way to make sure that the

restructuring actually works and you don't get entangled in all the legal issues that can come afterwards. So in the process of doing your research, did you come across any like interesting instances or anecdotes about the commercial creditors? One of the things is that the lawyers looked at precedence of how do you actually find out who is owed? money on the commercial side. So I found out that the commercial creditors range from the big banks, and there were many European banks owed money like we talked about before, but also just lots of trade credits and people owed money for small things like export delivered just before the sanctions. And they did struggle about how to actually do it. So one of the things that

they've been talking about was how not to do it. So one story, is that in 1975, Nigeria ordered 16 million tons of cement to arrive within a year for their harbor or to pluck a shortage. They hadn't really made the calculation correctly, so it was far in excess of what they actually needed to receive. The result was a run-up in trade debt that needed to be settled, and the government took out a newspaper ad asking anyone owed money to contact them. Now, obviously, a lot of people contacted them, and Nigeria was inundated with claim. It really was a debt reconciliation nightmare,

and it ended up settling only one third of the claims. So in the commercial settlement or reconciliation and part of the restructuring, they set out some very formal rules of how could you actually deliver a claim to make sure that you don't end up with just taking ads out in newspapers, hoping that anyone could just say, hey, I have no money. I love that. It's sort of the complete opposite to the normal situation to have requests for money actually flowing into Nigeria rather than out of it. I know. I wonder if that's the original idea for the Nigerian princess. Yeah. Okay, well, so A really fascinating saga of debt restructuring and one that could hold clues as to the future

paths of two emerging markets that are possibly on the brink of default. Simon Hinnrickson, thank you so much for coming on. Thank you for having me. Thank you, Simon. That was great. So, Joe, I really enjoyed that conversation. It brings together, of course, a lot of the themes that we've discussed on previous all-bots episodes, but it seems especially relevant in the context.

of what's going on in Venezuela, but also Lebanon. So it's nice to think about the Iraq example, whether or not it could be a blueprint for future restructurings or whether or not it was really an isolated special case. Yeah, I mean, there are certainly aspects of it that feel extremely isolated. The fact that so much of the debt was sort of two official entities like other governments that didn't have particularly much reason to extract a high price. You have to figure it would be difficult. We know there's a lot of debt held in countries like Venezuela and Lebanon where, you know, they're held by a money manager that has to earn some return or has clients.

But nonetheless, sort of a fascinating look at just the sort of unusual circumstances. We never really talk about the Iraq restructuring at all, which I guess is kind of the point of Simon having done the research. Yeah, exactly. Do you think that odious debt is ever going to get enshrined as a legal concept? I mean, the problem is there's inherently going to be an element of subjectivity, right? How much is the leader really representing the will of the people? How much was it for the benefit of the people?

The expenditure, the debt that was incurred. It obviously makes a certain amount of moral or logical sense that, you know, yeah, why should people who are born today have to or, you know, deal with the debts incurred by a past dictator? But it seems so hard to imagine there will ever be a point when people say, okay, yeah, you get to write this off because of the Pandora's box that Simon described. What do you think? What do I think? I think, well, this is sort of what I was getting with that question about how come all the debt incurred in the 1980s was okay as long as Iraq, was seen as beneficial to the international community

in the sense that it was fighting against Iranian hegemony. But then suddenly after it invaded Kuwait and it became very, very clear that Saddam Hussein was a bad guy, suddenly that same money can be considered possibly odious. So you sort of have this fluidity of debt, right? Like debt can exist for many, many decades. And in that period of time, the reasons it exists can change.

and they can switch from possibly moral to possibly immoral, it does seem like it must be one of the most complicated concepts in all of international finance, the idea of actually defining odious debt and actually trying to put it into law. I can't even imagine. Yeah, and I think that's what makes even current debt restructurings so interesting to watch. So set aside, the moral question, they're just so complicated because the legal frameworks are on clear. the moral questions about extracting real resources from an economy that's obviously distressed in the first place because otherwise it probably wouldn't be in this situation. Very interesting. I think that is partly why these will always be inherently complicated.

Yeah. But again, we might actually have a chance, I guess, to revisit the odist debt concept when, well, in the context of Venezuela. So that'll be an interesting one to watch. Absolutely. Should we leave it there? Let's leave it there. Cool. This has been another episode of the Odd Lots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Weizanthal. You can follow me on Twitter at The Stallwart. And be sure to follow our guest on Twitter, Simon Henrickson. His handle is at Simon H underscore DK. And be sure to follow our producer on Twitter. Laura Carlson. She's at Laura M. Carlson. Francesca Levy, the Bloomberg head of podcasts at Francesca today, and check out the whole family of Bloomberg podcasts on Twitter under the handle at podcasts. Thanks for listening.

June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases, the latest actions from Congress and regulators, and the legal moves driving the markets. from corporate law to constitutional law and from state courts to the Supreme Court. At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast.

Search for Bloomberg Law on YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. day and on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. What separates good leaders from transformational ones? I'm Jessica Chen and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example executives making an impact on the IHeart radio app,

Apple podcast, or wherever you get your podcasts.