Odd Lots - Jay Newman on the Coming Crisis for Emerging Markets

Episode Date: June 27, 2022

There are a lot of challenges facing emerging markets right now. For a start, the dollar has been pretty strong, heaping pressure on governments that have borrowed in a foreign currency. Meanwhile, energy and food prices are soaring. These are two things that emerging markets often have to import, or subsidize for their citizens. Put it altogether and you have a toxic mix facing developing nations, and we've already seen acute problems emerge in Sri Lanka and Lebanon. On this episode, we speak with Jay Newman, a long-time EM debt specialist and a former portfolio manager for Elliott Management. Jay has a wealth of experience in emerging markets -- including successfully going head-to-head with Argentina after the country defaulted on its debt. In this episode, he describes how the world is in for one of the worst EM debt crises in decades, and gives us his thoughts on how foreign investors should approach these markets. He’s just published his first novel, a financial, political thriller: Undermoney. See omnystudio.com/listener for privacy information.

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Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg television, radio, and wherever you get your podcasts. Hello and welcome to another episode of the Odd Thoughts podcast. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, it's been a while since we talked emerging markets. It really has been and probably to our detriment because there is a lot going on with EM, the commodities boom, the US dollar boom, the tightening cycle, inflation.

There's the distress in Sri Lanka, among others. So there's a lot to go. There's a lot that's been going on. Right. And every time you see the U.S. raise interest rates, you generally see some pain in emerging markets because the dollar goes up and the foreign currency payments that governments who have borrowed in the dollar have to pay, those go up. And it just feels like at the moment with everything that's going on, and you mentioned

the commodities boom, normally a commodities boom would be great for emerging markets, but this time it seems to come with a lot of imported inflation. Yes. So this time it seems like a really toxic mix for EM. And like acute shortages. So you could have a commodities boom and it's like, okay, there are a bunch of commodity producing countries seeing big, you know, cash increase in their import or their cash flows right now. But, you know, if you're a country that doesn't have much domestic food or a country that doesn't have much domestic wheat specifically and there's a grain shortage, then it's a very distressing time.

Yeah, a very toxic mix politically as well. And of course, the other big thing that's going on is Russia. Right. And we've had lots of people expecting Russia to default on its bonds. That seems almost certain to happen now, given that the U.S. Treasury has imposed even more restrictions on trading in the secondary market of the debt. They've also stopped investors from accepting bond payments from Russia. So it seems like a default is definitely going to happen, which means, of course, that we need to talk. about what all of this means. Let's get going. All right. Without further ado, I am very pleased to say we really have the perfect guest to discuss. We are going to be speaking with Jay Newman. He is a former portfolio manager, Elliott, very instrumental in Elliott's pursuit of Argentina and all the drama that happened there. He's a sovereign debt specialist in general, now turned novelist, and his book is called Under Money. That's out now. Jay, welcome so much to the show.

Tracy, thank you, and thank you, Joe. Thanks for coming up. So maybe, given your decades of experience in EM, maybe just to begin with, we could ask the big question. How bad is it right now for EM? And what is the most striking historical analogy or parallel that you would compare it to? I think it's almost the perfect storm for EM. And the only real comparison I can draw is from the very beginning of third world debt crises. which is the 80s.

The Foreign Sovereign Immunities Act was passed in 1976, the State Immunities Act in England, 1977. And then we saw a huge, huge volume of lending. It's the time when Walter Ristin famously said to excuse lending to development countries. He said, countries don't go bankrupt, which is completely accurate and totally useless, if you're a creditor.

But what we saw there was a period in which something like 25 countries default. Sorry, and what years was the... This was in... The defaults started in the late 70s, but they extended into the 80s, and they weren't resolved really into the 90s. It, of course, in the case of Argentina, which went on even longer. But we're talking about a period that could be very, very stressful and distressing for

developing country borrowers. Just going back, actually, before we even get too much on the president, why did 25 countries default? They defaulted because we were... markets closed to them. And that's what typically happens. The initial defaults in Poland and in Mexico made lenders very nervous. And when it came time to roll over the debt, there were no takers. That's what's happening today. I mean, it's almost an inevitable process. When things are good and money is easy, people pile in and the underwriters find, you know, plenty of buyers. But all of a sudden,

when one country defaults, let's take Lebanon, let's take Sri Lanka, which you mentioned, everyone says, whoa, what about country X and country Y and country Z? And then they become nervous, and then the debt can't get rolled. Is it inevitable in the current situation that investors start pushing back? And I mean, the reason I ask is because how many times has Argentina defaulted now? And someone out there is always buying the new bonds that it issues. It feels like investors learn their lesson for, you know, maybe a month, and then the next year they forget it again, and people are buying EM indiscriminately. It's a, it's a complicated ecosystem, and it's rotation.

Because what happens in the first instance is that the buyers tend to be real money buyers, retail investors through mutual funds that are responding to advertisements. You've seen those ads in the paper, which show past performance, and they always show the best performing funds. And periodically, those are emerging market funds. And that's when sales pick up. And the mutual fund investor and buyer is driven by indices. So there's always a buyer if the country's in the index,

whether it's Argentina or Russia, those bonds have to get included. And that's why they're bought. Then what happens is after default, they get puked. and other more opportunistic investors like hedge funds come in and the cycle starts over again. You mentioned that quote in the beginning that countries don't go bankrupt. And as you say, it may be true, but completely irrelevant to an actual creditor of the country and whether they're going to get paid back or not. Why do countries choose to default?

I mean, in theory, a government has certain choices it can make. it can cut back on domestic spending to prioritize lending. What are the conditions that tend to precede a government making the choice? Like, you know, we're not going to, why do they do that? So so many questions nested in what you just asked, Joe. It's always political. Countries don't typically borrow with the intention of default. But on some level, it's always in the back of the mind of,

a politician because they borrow to get money they can use for their own purposes, whatever those are, whether therefore legitimate infrastructure and building or corrupt purposes, which in many cases they are. But it's a political decision. And it's only when the money is cut off or threatened to be cut off that political figures in borrowing countries decide that, well, maybe it's not worth the trouble. Is it, is part of it the idea that politicians are satisfying a domestic constituency and so foreign investors kind of are a very easy demographic to just, you know, leave out and say, well, we're going to screw over the foreign investors in order to satisfy our population? Easier and easier for a variety of reasons.

One you've mentioned, which is that markets have short memories, and that's certainly true. But the other piece is that when a country runs into trouble, the multilateral organizations all rally around it and actually other governments rally around it. So in the case of Sri Lanka is just a case in point, we're going to see, we will see the IMF and the World Bank and the Asian Development Bank and the G7. and the G20 all saying, oh, poor Sri Lanka, not blaming Sri Lanka for their problems, but looking for an opportunity to fleece foreign lenders.

And that is a consistent pattern. What's different today, and I know we'll get to talk about this, is the role of China. Because China is increasingly has the whip hand in essentially in developing country lending. So explain that further. what exactly is the role of China in emerging markets and how much does the outlook for EM defaults depend on what China chooses to do or not do? I think China is the critical element in emerging market lending. The One Belt, One Road Initiative has meant that China has provided money, either loans or

investments in dozens of countries around the world for ports, for rails, for, communications infrastructure, you name it, the Chinese are promoting it and lending money to developing countries. So China has become, and this is the critical element, China has become a huge lender and investor in developing countries, but no one knows how big they are. No one knows. I mean, the Chinese know, but no one else, because the contracts under which they invest are secret. I've asked on many occasions to see a copy of these loan agreements, and it's always we can't talk about that. It's part of our agreement. And I don't think even the IMF has a clue what the scale of those investments are, which means that when you face a restructuring,

you've got a creditor, a very aggressive and important creditor, China, which doesn't want to take a discount at all. So you have a super senior element there that we've never seen before in the history of EM lending. I was about to ask what kind of creditor is. China. I know it's hard to tell because we haven't really seen them enter a massive default cycle since they ramped up their lending. And you're completely right that it's hard to tell the scale of that lending. And Bloomberg has made attempts at various points in time to put a number on it. It's very, very non-transparent. But what sort of indication do we have of how they might behave in a distress situation? Well, how they behave in pretty much every commercial situation,

they're right and you're wrong. And they're implacable foes on many levels. But particularly when it comes to the debt, it's just, I'd like to just go back to this very little geeky, but I think important point, which is, can you imagine a sitting down at a negotiating table with a group of creditors? You've got the IMF, the World Bank,

other multilateral institutions, and you've got different creditor groups, banks, industrial lenders, investors, and bondholders. Everyone's at the table. Everyone's documents are on the table, except for China. So you have this huge force, you know, in the room and outside the room, that won't tell you how much they owe and isn't really to take a discount to make things, make things fit together. So it's almost, in that climate, it actually becomes, in my view, impossible to have restructurings that really get countries out of the woods and put them on a strong financial path.

Because you've got one, it used to be that we would complain about the IMF, insisting on being super senior. Now you've got a creditor that is placing itself super senior to the IMF. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report, delivered right to your podcast feed. Bloomberg News Now is a short five-minute audio report on the day's top stories.

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Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. Something that we talk about on the show from time to time is the sort of difference between, you know, the financial cycle and the economic cycle. And, you know, what we've been talking about so far it seems like very much the financial cycle. And you mentioned, you know, you have this situation where one country or two countries default, suddenly all the money pulls back. Or in the flip, a bunch of retail investors see that, you know, look and open their copy

of Barrens and see that on the best last five years that some EM funded, like, yeah, I'll put my money in there. What is the, so there's this global, clearly downturn in the sort of liquidity cycle. The financial cycle is clearly in retreat. What's the macro cycle, like the sort of like actual like underlying econ cycle and how much stress is that put in countries under? I think the, what's happening even in the last three months with prices of energy and food stocks is something we haven't seen in a long, long time. And it puts a lot of pressure on every country because the first obligation of a government is to keep its people warm and fed. And I think to the extent that that's put at risk and it is at risk now in dozens of countries.

countries, countries really have no choice but to prioritize those needs over payment of foreign debt. It doesn't mean that they don't respect foreign debt or intend to restructure it or repay it at some point in time. But I think in the near term, they'll make a correct political decision for themselves to delay, defer, or deny those payments. So Joe asked a question that I thought was interesting, which is why do countries default? And I want to ask a similar question about incentives and decision-making, but you were at Elliott for a very long time. How did you decide what distressed investments to make? Because you targeted, you know, some very specific, not just countries, but very specific bonds issued by those countries.

There are a few really important elements to any investing and particularly sovereign debt investing. One is that the contract has to be strong. And sovereign bond contracts have gotten much, much weaker over the last 20 years, really a concerted effort on the part of the official sector and the G7. The Europeans have been at the forefront of this diluting covenants and making it more difficult to enforce in the event of a default. But the most critical element is your basic financial analysis of the country. And Tracy, you're absolutely right. At Elliott, we were extremely selective in the debt that we bought because you really had to believe, you always have to believe when you're buying sovereign debt that the debtor is capable of honoring its

contracts. And so those are the two critical elements. Is the debtor able to pay? And contractually, is there a way to keep them at the table? So I have to ask, would you have bought Russian bonds? With that in mind? I have never bought a Russian bond. I never would buy a Russian bond. Russian, and in fact I hadn't looked, until recent days, I hadn't looked at the Russian bond contract for a very long time. And I had forgotten this, that Russian debt, Russia does not waive sovereign immunity.

So the critical element of contemporary bond contracts is a waiver. of sovereign immunity, which means that you can sue by agreement. You can actually go to court and discuss the issue. Exactly. You can go to court typically in either the U.S. or the U.K. or both. And that is an essential element. The other one of the other critical pieces is not just waiving immunity, but agreeing where you can be sued. So if Russia says, I don't waive immunity, we're back to a world that we haven't seen

in sovereign debt since the 50s, well before that. the Foreign Sovereign Immunities Act and the State Immunities Act, where the sovereign is a beneficiary of absolute immunity. It's what sovereigns are. They do what they want when they want. They pay what they want when they want to pay it. And that's the position that Russia staked out for itself. Why was there, I mean, we had a, we talked about Russian debt, I think back March here early on after the invasion. But, you know, we talked about the fact that there weren't many covenants, that there were all kinds of things buried in the language that seemed to be sort of favorable for Russia all those years. Even after the invasion of Crimea, I think, which was in 2014.

Yes. Why was there still so much willingness between that period when it was clear that the country would be willing to be a military aggressor and engage in activities that people would associate with a prior state? Why up for basically another eight years after that? And then the conditions that you just mentioned, about not waiving sovereign immunity. Why was there so much willingness for all those years on the part of buyers to continue buying Russian bombs in your view? Because Russia was a great payer. They kept paying throughout, even after the sanctions imposed post-K Crimea in 2014. And they showed no indication of not intending to honor their obligations. So Russia looked like a strong credit.

And in fact, Russia, even in the beginning of this crisis, post-January 24th, Russia insisted and did make payments. So Russia really appears to all intents to intend to be a responsible debtor. Right now, it's because of sanctions. It's foreclosed from doing that. I want to go back to something you said about Sri Lanka and you're like, okay, there's a default. but the world comes together in all these international institutions, the IMF, the G7, the Asian Development Bank, etc. And they try to help Sri Lanka out. It's not Sri Lanka's fault that they're in the stress. And when you said that I clearly got the impression that you think that this is a bad system

or that this sort of generosity towards Sri Lanka in the wake of a default is not productive or misplaced. Can you talk about your view a little bit more on that? I mean, it's been a pretty tough two years. There was a pandemic. then there's been surging inflation. Why shouldn't all these public or official institutions take the view that Sri Lanka got into a bad place and they need help? If we go back to basics and I wrote a little piece about this that I called Unsafe at Any Price, comparing sovereign debt to the Corvair. Sovere, the idea of a sovereign borrowing and a currency that isn't its own is,

is fundamentally flawed. It's a really bad idea. But the entire structure of the sovereign debt industry is, you know, it supports the idea that it's not a bad idea. But if you take the case of Sri Lanka, if Sri Lanka had borrowed in its own currency rather than in the dollar or in the euro, it wouldn't have a problem

because it could just print its own currency. Now, the response to that, and we get this all the time, people saying, well, but they couldn't borrow, if they, they couldn't borrow that much money unless they agree to borrow dollars. And isn't that just the point? So would you argue therefore, I mean, you know, again, I'm really struck by this idea that flows often start because retail investors see the ads in the newspapers, that really this whole system of a sort of like public, financialized sovereign debt market, particularly for EMs, is sort of flawed to the core. completely, completely flawed, completely rotten. If it were, if we're up to me and I had my magic wand,

I would repeal the sovereign immunities act and I'd repeal the state immunities act. And I would go back to the principle of absolute immunity. Because if you're, if you're looking at absolute immunity, and maybe the Russians have the right idea, perhaps not borrowing in a currency, not their own, but the right idea in saying, if you look at me as a sovereign, I'll pay you, what I want, when I want, and you have to trust me. And that would put investors on a very different footing. It wouldn't make the underwriting community at all happy about it because it would mean that they couldn't sell as many bonds. But wouldn't that be sagittary? It definitely sounds like you'd probably get less boom bust cycles. It would be harder to sell debt, probably during the boom, I guess,

but you don't get these huge swings and flows. I think that's exactly right. Could you talk a little bit about ESG and how that relates to sovereign debt? Because, you know, we were talking about the Russian bonds. And one of the things that stands out is that if you read the risk factors, it's just a litany of bad stuff that Putin has done, basically saying that he's done a bunch of bad stuff. There might be sanctions. He could do more bad stuff. And yet you had big investors who ostensibly care about ESG and social values who bought a lot of. of the debt. And at the same time now, you're seeing a lot of people talk about ESG as a sort of

political consideration. So do you want to lend to Russia if it's considered an enemy of the United States and things like that? I think the short answer to that is no. I think a lot of people are not going to be, a lot of people will be taking ESG into account and there'll be less of a market for certain debtors. But it's, if you're going to, if you're going to, if you're going to to cast the ESG net over developing countries generally, you're going to run to trouble because we're talking about countries that on average, and it's unfair to malign people as an average, governance is poor, and in many cases, corruption is rampant. And at the same time, countries are a producer of natural resources that are desperately needed by Western industrial

countries. So people are willing to turn a blind eye to all those factors because of of the geopolitics and the geo-economics. So do you think we will see, I mean, okay, so so far in this cycle, what have we seen? We've seen Sri Lanka, it has defaulted. Anyone else? Lebanon. Do you expect to see several more coming? I mean, if you say this is, you know, I think in your first answer, you said a perfect storm,

which is a phrase, Tracy and I know it every day. So in any thought, every episode these days, whatever it is, copper is in a perfect storm, the dollars in a perfect storm, tech stocks are the perfect... Wheats is a perfect storm. There are a lot of perfect storms happening right now. I mean, would you expect to see just the absolute number of defaults pick up significantly? I would expect it to... And I think it's actually what you're describing is actually one big perfect storm.

Right. Because all these things are related. And it's because we haven't seen this kind of a boom and a bust in financial markets were this kind of a bust in, what, about 15 years, and maybe on the tech side over 20 years. So there is so many elements that conspire against sovereign debtors continuing to be able to pay what they owe. So you touched on this a number of times, but would you expect a bust of a significant scale to lead to some sort of significant change in the way emerging market debt markets actually work? I mean, would you see the balance of power shift more to the creditors away from the issuers? Would you expect less foreign currency debt to be issued in general and things like that?

Or do we just have a default cycle and then we just go back to the way it always has been or the way it's been for the past couple of decades? I don't expect there to be a lot of fundamental change. I think we'll get through this period. And the other important piece is that the absolute amount of developing country debt is rather small. in international financial terms, it's not big enough to in and of itself cause a problem except for the debtors themselves who get trapped in a cycle that takes many years to work through. But what is somewhat different in this cycle, and we saw it two years ago in the case of

Argentina in their most recent restructuring, is that the bond contracts are so weak. So creditors realize that they don't have a lot of leverage. and because they don't have a lot of leverage, they agree to deals that are much, much better for the debtor and much worse for creditors. And I don't see that changing. I think if investors study the details, they'll realize that these are not, the bond contract isn't a safe place to place your bet. History being what it is and markets being what they are, I don't think we're going to really

see much change. So you mentioned Argentina. And, you know, that was an enormously profitable trade for Elliott famously. And you just spoke about the importance of actually looking at contracts, looking at the bond documentation and sifting through it. What was the smartest move that you pulled at Elliott when it came to Argentina? What were you most proud of? And please be as technical as you want, because I have some specific things in mind, but I'd love to hear what you're thinking.

I think that it's easy to be grandiose and take credit for the Argentine restructuring, but in fact, many creditors work together in that. And I think that one of the things that I'm most pleased with is the ability of the creditor group to really stick together and be thoughtful about what was possible in terms of an Argentine restructuring. And that collegiality persisted to the very end through the restructuring and ultimately result in. restructuring that was extremely good for Argentina and extremely good for the creditors that remained standing. But a lot of creditors, of course, were peeled off along the way by the Kierchner's aggressive tactics and populism. But I think that the idea of collective action is something that I think about a lot in terms of restructurings generally and emerging market restructurings, you know, in particular. And you see that ability to act collectively fading.

The diversity of creditors in Argentina, I think, produced a, in most recent restructuring, produced a very bad result with, you know, massive debt forgiveness that was completely uncalled for because creditors really couldn't agree amongst themselves. And this is what I call the just say no moment. That when you're faced with a situation in which it's, you have no leverage. and the debtor is being aggressive and obstructive and obstreperous, which defines Argentina. Sometimes you just have to back away from the table. But that is the most difficult thing to do because there is a propensity on the part of participants in any situation to want to stick with it and remain at the table.

And sometimes you just can't. But that's the one element that if creditors can really understand that, embrace it, and resort to it, it would be much better. Sorry, I have a really basic question, but if a country defaults in the market, they're supposed to be penalized in some way for that. In theory, right? People are supposed to say, well, they're not a reliable borrower, and so we're not going to lend to them again.

If you're an investor or a creditor and you back away from a negotiation or you don't do something that the sovereign issuer would have liked you to do, Do you get shunned in the future from debt sales or do you get penalized in any way? I think you do get shunned. I think Argentina is currently being shunned, will be shunned. But I think it takes a long time for markets to develop that kind of muscle memory. And in the case of Argentina, it's taken decades and decades for people to realize that fundamentally, Argentina is not a reliable counterparty.

I think for most other countries that don't have that kind of history of aggressive defaults and repeated defaults, investors are willing to give new governments a chance. I think the question is going to be whether, in the case of Argentina, when and if there is a change of regime, markets will give that new regime a chance. The Macri administration is perhaps one reason that investors shouldn't jump in too quickly, because Macri was there for a very short period of a time. He did restructure the debt. He did bring Argentina back to capital markets. But as soon as he was gone, Argentina was back in the tank. But what about investors? Do they get penalized as well if you don't, you know, do what a government wants

or if you walk away from the negotiating table? We haven't seen that happen. Okay. How do you know when that moment is there that it's time to walk away? I mean, I assume this is what separates the elites from the right. But what is it? How do you know in that moment is there? I just say no.

In the case of Argentina, as the discussion went on, it moved to Argentina saying, we're going to pay what we're going to pay. And creditors then, at the behest of some of us who were encouraging a restructuring of the bond contract, some creditor said, well, if you're going to give us a 50% haircut, even though you may not need it, and even though you haven't put forth a fiscal plan that describes your capacity to pay. If you're going to do all those things, at least give us new bond terms

that are going to be, create what I call a super bond, a bond that is actually enforceable and would be senior to any other kinds of debt. And what Argentina said flat out was, absolutely not. We're going to be the same garbage covenants and the same garbage paper

that we're currently sitting at this table talking about. That would have been a moment, moment to say, we can't live this way. We can't live with a default, a massive haircut, and a bond contract that makes it completely optional whether you ever pay us another dime again. On April 4, 2023, around two in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm.

Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Can you explain what you mean by the restructuring was great for Argentina, too? Well, I think it was great for Argentina in the sense that Argentina now has a much more manageable level of debt. It's got a bond contract that really does make repayment an option. It makes it can pay or not pay, depending upon a. its view of its financial situation and its market access. So I think that it's, Argentina is, for the moment, in the catbird seat, except that it doesn't have the kind of market access it needs,

and doesn't have the kind of credibility it needs. And one example of that is the Vlacomerta. So this huge formation of oil and gas, it's shaped like it's called Vacomwerta, and I've fractured the Spanish, but because it looks from the sky like a dead cow. And it's a, it's a massive reserve of hydrocarbons. That should have been exploited, you know, through drilling, through pipelines, through exports over the last many decades. But because of Argentina's fractious politics, it hasn't been. So you have a, you know, a country as ever, in the case of Argentina that ought to be incredibly wealthy. That isn't because of its own peculiar psychology. I just remembered, I mean, they did issue that 100-year bond, remember, which is now doing...

What's a... Do we have a quote on the other? Where is that trading? I love to know that. Well, so this was going to be my next question. So it's trading terribly at the moment. Largely, because of duration, you would expect a bond at a hundred-year maturity issued at a very low interest rate to have like a high duration risk. And as rates go up, it's going to get crushed.

How much are the pure interest rate dynamics, you know, setting aside credit fundamentals, but just the dynamics of interest rates actually going up and increasing payments for emerging markets, how much is that a problem? It's always a problem. I think you described that, Tracy, at the very beginning of the hour. As prices for new debt go up, the ability to refinance goes down, and that's where countries run into trouble. But the hundred-year, maybe we should think about 100-year bonds, as a bellwether. You know it's a bad sign when somebody's able to borrow, especially a country

that doesn't have a hundred-year history of borrowing can borrow for 100 years. That's just madness. So one of the things you're known for at Elliott is basically, I'm thinking how to put this, but creative solutions to pursuing payouts. And I remember, for instance, you brought racketeering charges against a French bank. How do you, and of course there was the famous story of seizing the Argentine naval ship and things like that, but how do you actually come up with those sorts of ideas for pursuing payouts? Because some of them are quite creative in the sense that not everyone, well, no one had tried

them before. Most countries pay what they owe. And whether they pay it early on or later on, they have a willingness to actually make good on their obligations. So we're talking about the hardest cases making the worst law. And so the very few countries that have a kind of cultural indifference to making good on their obligations, create a lot of need and opportunity for creditors. And so that's where the creativity comes in. When you have a country that really doesn't want to pay what it owes, you're in a position where you just have to keep getting their attention. And the Argentine saga, which, and again,

it wasn't just Elliott Management, it was many firms that were involved in that over a long period of time, the goal was always to get Argentina to the table. Because even though many creative attachments and arrests, you mentioned the Libertad, planes were arrested. In France today, the plane of the President of Congo is under arrest. And as a about to be auctioned. Sometimes people have attached oil cargoes. You have all sorts of creative avenues, but debt cases don't get resolved through attachments and through execution against assets. They always get resolved through settlement. So the goal is always to get the attention of the debtor, but not push them away. Unfortunately, sometimes creditors do things that do

end up pushing them away. And then the only opportunity is really regime change. And that is what happened in Argentina. While Christina Kirchner was in charge, it had become impossible because she loved calling creditor as vultures and she loved her stature as someone who was standing up against them. Well, just on this note, I mean, is there anything that you regret doing or something that you would have done differently with the benefit of hindsight? As an investor, you always regret not buying more of the things that did well. I want to actually go back to the discussion of the novelty that is China's role as the sort of very senior creditor. You know, when I, you know, the one belt, one road initiative first sort of came on my radar or something I thought about.

It seemed like, well, this is like, you know, a strategic act of foreign policy. So it's like, yes, you invest, you know, China invest in infrastructure in numerous countries. but, you know, for part like foreign policy influence and to build up a trading partner and so forth, is it surprising that instead it's taken such a hard line simply on the question of being paid back? Because if you do think like, okay, is this about, or I would have thought that if this is about extending China's foreign policy reach or extending, it's just sort of deepening its relationships with countries all over the world across Asia, across Africa, that it would have been. been more conciliatory on the restructuring side to maintain those relationships?

I agree with you that that would make sense for China if it wants to be part of, you know, our current Western liberal tradition and system. But China gives no indication of wanting to be part of that system. China has, I think, a very different view. It has a different system. It wants to go its own way. And if it can disadvantage and crush other creditors in the course of restructurings, that appears to be what it wants to do. I think we really can't talk enough about China and the role of China in developing economies

on every level from the perspective of controlling natural resources, from the perspective of being a direct foreign investor, from the perspective of being a lender. China will be the dominant question for the next several decades, unless things change. And it's unclear what could cause anything to change because China still has the ability to pump out huge amounts of money and people to develop projects around the world. Should governments in the U.S. and Europe be more proactive or be thinking more aggressively than they are about not seeding all of this influence in various developing markets to China?

I think there's no question that that's the case. But can you imagine Western governments being having a cohesive and a coherent policy? No. On any topic. On any. Right. Let alone an African development policy. So let's just take the simplest possible question. You're the G7 and you know that China is the big dog. And you know they've invested in lent huge amounts of money.

Yeah. You just want to see the contracts. You just want some transparency. Right. So Western governments should be insisting as a condition of any restructuring that involves sovereign debt, whether it's private sector or public sector, that all the creditors come to the table and put out their cards and show what they've got. And that would seem to be a very easy position to coalesce around, but will it be? Just on the topic of China, and this is something else that's come up recently in a different way. But there is a sense out there that

some of China's lending has been exploitative in one way or another. So we haven't seen the contracts exactly, but there's a suspicion that, for instance, a country might be giving up some portion of sovereign independence in order to get money from China to build a massive port, something like that. And we've also seen some noises around, you know, on the other side of the world, Haiti and the idea of reparations. And you've already mentioned the V word, which is vulture funds. And when it comes to distressed debt investors, there is a sense that they can be exploitative in some way. And they're ringing money out of poor nations. How would you respond to that criticism? And how are you thinking around the idea of reparations for sovereign debt injustices in general?

The word that comes to mind when we embark on this kind of a conversation is the C word, which is corruption. And I don't think there has ever been a sovereign debt crisis or sovereign debt problems where corruption isn't an underlying issue. And this is another place where Western governments could take a very insistent role, a place where the IMF could take a very insistent role, and focus on corruption. And not just the existence of it or the past effects of it, but the possibility of recovering ill-gotten gains. I'm thinking out loud now, I wonder whether what's happening with sanctions in the case of Russia might be a watershed. Because Western governments have become very willing to sanction the vast numbers of individuals around Vladimir Putin go after their bank account. accounts, their companies, notably their yachts and their planes. And at this point, at this point, most have just been seized. They haven't been confiscated. But I've never been involved in a sovereign

debt situation in which the, if you were really thinking about the balance sheet of a country, corruption and ill-gotten gains shouldn't have been an issue. And just, if we just imagine a world in which creditors became in a way private attorneys general, and were licensed to go after people that have been milking a country for decade after decade, which unfortunately is all too prevalent. You just have to look at transparency in your national rankings to understand that, whether the whole dynamic wouldn't change in a very positive way. Just to push this a little further, in theory, if you have a country that has a highly corrupt government,

you know, and then you have a regime change, I mean, I guess part of the argument seems to me that, well, the citizens of the country shouldn't be like punished in perpetuity for years or future governments shouldn't have to make this decision about, well, are we going to pay back the debt of the past corrupt government, or are we going to feed our people, or are we going to build hospitals, are we going to build infrastructure? I mean, it seems like you still have this like problem where, okay, even if you were to root out this corruption, that the citizens who are just there often probably exploited themselves in many cases are then still paying the price for mid-discipline. gets to the odious debt conversation that we've had around Iraq and others, but are still paying the price regardless of their culpability.

It's bad government is unfortunately a huge, huge problem. And I'm completely sympathetic to the idea that people that live in these horribly corrupt and opaque regimes are punished. But how do you break the cycle? It seems like getting back to your other point that the entire system of, you know, private investment in sovereign debt, particularly sovereign hard currency debt, is just deeply flawed. And he gets back to this idea. It's like, why do we even have all of these private creditors out there in the first place, or such a large number of private creditors at all in the role of sovereign finance?

Well, investors are fundamentally optimistic. And there's a whole other level of investment that we haven't talked about, which is, and you just mentioned this, Joe, which is the foreign direct investment. And you have recent cases in particularly involving India, world's largest democracy, which when it's faced with arbitration awards, because its confiscated property, decides to vilify investors and avoid payment. So it applies not just to debt, but foreign direct investment. And this fundamental optimism on the part of investors, because we are, you know, every time you lend money or invest money, you're being optimistic. about your, not just your own process and your own analysis, but the capacity and willingness of your investee or your borrower to honor their obligations. But to the point about reparations, this is, it's an issue that's on the table.

It's obviously being discussed, but I think it can't be discussed in a vacuum, and it really has to be discussed in a context. And you look at a country like Haiti, where elites have really destroyed that country of it by milking it. consistently over decade after decade after decade. How can you talk about reparations without going after the elites that have stolen the country blind? This is how you get there? I'm not quite sure, but I know that you have to get there to have a fair and sensible conversation about all those questions. All right, Jay, it's been so great having you on the show. Thank you so much. That's Jay Newman,

formerly of Elliott and the author of the novel Under Money in Bookstores now. Jay, thank you so much. That was great. Joe, that was a really interesting conversation, I thought. And one of the things that stands out to me, and I know the benefit of hindsight is 2020, of course, but the Argentine 100-year bond.

Just this idea, whenever you see a country without a hundred-year history of issuing debt, issuing for a century, that's a warning sign. It was a really crazy time. I mean, I got like, you know, there was also the Austrian one, but like, okay, I understood time. That's just a normal long duration. As a half Austrian and we should leave Austria alone, you know. But yeah, there were the sort of two famous century bonds.

I was also, I mean, there were a lot of interesting things. The unique novelty. Well, actually, you know what I was really struck by is Jay's point that maybe this whole system of borrowing hard currency debt is flawed. And, you know, of course, we've had the MMT. conversations and all the people saying, well, you know, the first thing that these countries should do is stop borrowing in dollars, stop borrowing in currencies that they can't print themselves, whether they be dollars or euros, that would at least get you somewhere, some progress. So it's interesting to hear a veteran of the actual industry kind of say the same thing from the

other perspective. You managed to bring it to MMT, didn't you? All right. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway.

You can follow me on Twitter at Tracy All right. away. And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart. Follow our guest on Twitter, Jay Newman. He's at Jay Newman. Follow our producer, Carmen Rodriguez, at Carmen Armin. Follow the Bloomberg head of podcast, Francesca Levy, and Francesca today. And check out all of our podcasts at Bloomberg under the handle at Podcasts. Thanks for listening.