We have one of those round robin articles where the – liberally inclined in the American meaning – Great and the Good tell us how the world should be run. The correct answer to which, in this as so many other cases, is bugger off Matey. For what they’re demanding is a retrospective change in the contract. Once that pass is sold absolutely no commercial behaviour is safe.
The article itself is here and my word is it badly written.
While some ad hoc relief has already been promised by official creditors, indebted poor countries are again facing private creditors without a sovereign-debt restructuring mechanism – the global equivalent of a bankruptcy regime. In the absence of such a framework, called for by the United Nations General Assembly and advocated by many experts and stakeholders, there have nevertheless been some constructive innovations in contractual approaches to sovereign debt. These address at least some of the collective-action problems of restructuring, including opportunistic holdout behaviour.
What they’ve published is the bit that should go in the third appendix where the details are explained to those who aren’t quite up to reading footnotes. The thing they’re not doing being to explain, to the averagely interested and informed individual, what they’re really trying to do.
So here is that explanation.
An organisation – a company, a country, whatever – will often borrow money from different people at different times under slightly different circumstances, for different periods of time at different interest rates and so on and on. We call each different slice of this debt a “tranche”. So, we could have TimmyBond 2028 1.5% (roughly equal to my mortgage perhaps) and TimmyBond 18% Note (my credit card outstanding balance say). Each is a tranche.
As and when I go bust, or need to renegotiate, we need a system where each person who has lent to me is equally treated. Equally before the law that is – there will be different terms in each of the debt contracts I’ve signed.
There’s nothing different with sovereign debt in this….in this specific demand for equality before the law.
In corporate and sovereign debt there is something called the collective action clause (CAC). So, we’ve all these different people who each own a slice of different tranches. Countries don’t actually go bankrupt, so it never is possible to just say they’re bust, sell it all off and start again. There must be an agreed solution between the borrower and all those different creditors.
The CAC says, in its effect at least, that one group of those creditors cannot screw over another. Or, if you prefer, that all tranches get a say. Or even that the borrower can’t pick out one group to shaft worse than the others. It does so by saying that to agree the changes – we’re going to pay you back less than we said, or extend the loan, or drop the interest rate – we need to have a majority of the creditors agree. Obviously so, that’s what an agreement means. But also, a majority of the holders of each tranche must agree.
The intuition here should be obvious. Each debt issue is a contract, to change the terms of that debt issue needs the agreement of those who are party to that contract.
So, when we try to agree one of these sovereign restructurings then we do face quite a hurdle. A majority of the holders (a majority by weight of $) of each and every tranche have to agree the overall settlement. Those who don’t agree, that tranche is left out of said settlement.
So far this all works absolutely fine. The thing is those CACs used to say that the majority needed was 90% of each tranche. When Greece went pflooie we found out that this was really, really, difficult. So, the new standard, in near all new contracts, is that the CAC requires a 75% majority of the holders of each tranche.
That’s also fine. Everyone has the opportunity to lend or not under the new contract and take their lumps under the new contract.
There’s also a newer idea that instead of each tranche having a say it’s the overall majority of all the debt that matters. That’s also fine for the same taking the lumps reason.
The demand in this letter is that the old debts, issued under the old CACs, should have the new CACs imposed upon them. And that’s what’s not OK. Because that’s a retrospective rewriting of the contract.
The Greeks actually did this, they changed Greek law so that the CAC requirement was only 75% and so many creditors did get right royally screwed. Those holding English law bonds, where the rewrite couldn’t be done by the Greek Parliament, weren’t so screwed.
Which is what Jor Stiglitz and all are calling for right now over Argentina. That the contracts upon which Argentina borrowed money in the past a rewritten now.
It’s entirely fine to offer new contract terms for future actions. But to be able to change the law about the past? Nope, bugger off mateys. Because if we do allow this then no property is safe.
Absolutely none of the signers of this letter would allow their native government to change the criminal law in this manner. Make an action yesterday, which was legal yesterday, something they can be charged for today. But because this is about other peoples’ money they all sign up to the idea. Most of them, to be kind, because they don’t understand.
We don’t have retroactive laws and we shouldn’t. That their absence is aiding the international capitalists in shaking down Argentia is no excuse for us to have them.