EMTA celebrated its 25th Anniversary at its NYC offices on December 7 in style by presenting “Emerging Markets—Then and Now”, featuring three panels of EM luminaries, followed by a cocktail reception. As EMTA friends, old and new, converged for the event, many celebrated the past and shared new lessons learned for the future.
Panel One Discussion – EM Origins and Birth
Martin Schubert (European InterAmerican Finance Corp.) moderated this panel, with the following speakers: William R. Rhodes (President & CEO, William R. Rhodes Global Advisors, LLC , former Senior Vice Chairman, Citigroup, Inc.), Lee Buchheit (Cleary Gottlieb Steen & Hamilton), David C. Mulford (Vice Chairman International, Credit Suisse and former U.S. Under Secretary of the Treasury for International Affairs and Ambassador to India), E. Gerald Corrigan (Goldman Sachs & Co. and former President of the Federal Reserve Bank of New York) and Guillermo Ortiz (Grupo Financiero Banorte, former Finance Minister and Central Bank Governor of Mexico). Panel One Questions can be accessed by Clicking Here
In response to Schubert’s question “What was the most vivid experience of the 1980’s you faced following the Mexican payments stoppage, funny or otherwise?”, as well as related questions delineated above, Rhodes recounted two of the more memorable moments that took place as a result of the 1982 Mexico debt crisis:
"1. At the IMF World Bank meetings in Toronto in September 1982, just after the announcement of cessation of payments by Mexico, the joke was that working with Mexico, as well as with other countries due to follow, Argentina, Uruguay, Brazil and Peru, was like re-arranging the deck chairs on the Titanic. The world financial committee was concerned that Mexico would throw the world into a disastrous economic depression.
2. At a meeting during the IMF sessions, Walter Wriston, CEO of Citibank, and I met with Paul Volcker, who was Chair of the Board of Governers of the Federal Reserve System, on how we would handle the Mexican debt problem. The joke was that I was mediating between the world’s tallest regulator, Paul Volcker, and the world’s tallest banker to agree on an approach.
Another moment of great concern occurred several months later when the Mexican Minister of Finance, Jesus Silva Herzog Flores (Chucho), who was the final authority on the debt restructuring with the banks, suddenly disappeared from view in Mexico. This became a moment of great tension because it was rumored that he had disappeared or had passed away. We were at a very delicate stage of the negotiations and when I asked Angel Gurria, Mexico’s chief negotiator, when the Minister was returning, he said he was not at liberty to say anything. The banks were nervous and it leaked out to the press. I decided that I needed to find out what was going on and I flew to Mexico to find out the status of the Minister. The joke was that it was like Stanley looking for Livingston in the 19th century. On my third day there, I received a call from the Minister. He was in the hospital and was ok; he had an appendectomy and would soon return full time to his job. This sent a sign of relief to the International financial community and allowed the negotiations to finalize."
Mulford recalled the massive confusion (of “self-serving ideas”) at the time regarding what was the best path forward to resolve the Mexican dilemma. Multiple ideas and proposals abounded. The Baker Plan was not a failure because it “bought time”, but essentially was unsustainable because the underlying problem was not addressed and banks increasingly would not provide new money. Banks began selling their paper on a discounted basis because of a willingness to accept the reality of some discount on their loan paper. Ultimately, this resulted in a market “mess” with a build-up of arrears, which increased the corpus of debt “astronomically”. Nicholas Brady, as US Secretary of the Treasury, understood that in 1988 and convened an Economic Cabinet whose mission was to write a “truth serum” paper to define the reality of where the banking world was and to provide solutions that could only be elucidated if they did not conflict with such reality. Naming the new debt plan had its own anecdote. When the name Bush Plan was suggested, the President demurred, suggesting instead that it be called the Brady Plan if it worked and the Mulford Plan if it did not. The Brady Plan was implemented for the Mexican (and subsequent) crises and the rest is history. Related solutions made it more palatable so banks would not have to recognize the debt on their balance sheets. The moral of the story, Mulford advised, is that Europe (and any other group in crisis mode) must face reality and prepare objectives and solutions that comport with such reality.
Corrigan stated that “relationships matter” and the “chemistry” between institutions makes a difference in how crises are mitigated. He conveyed the multi-faceted list of issues that comprised the regulatory framework of an oversight system (especially in the sovereign debt context). “Putting Humpty Dumpty, with moving parts, back together again” was not easy. A set of initiatives and related plans were amassed “early on in the game” to work in the direction of substantial change in the fiscal policy of the sovereign nations in trouble, because without the fiscal under control, other areas would be difficult to manage. While there was a real concern that it couldn’t be pulled off, the “rabbit was pulled out of the hat” and positively affected every claim of financial institutions around the globe. “Not a single nickel of taxpayer or central bank money was spent to bring about that stability”, “open and friendly” discussions ensued “without pieces of paper”. By 1991, Corrigan came to the conclusion that conditions for a big market failure were present, and, looking ahead, the industry still has some strong “heavy lifting” to do (with the lifting of the next period being very different from the 1980’s or 1990’s with the geopolitical, economic and political factors that “have gotten much worse”). One can never be able to provide economic recovery until one finds in the international arena ways to fix these global problems. Results have to be mustered on a collective basis in order to “turn the tide” (and, if one doesn’t turn that tide, bigger problems throughout the world will abound).
As Mexico’s former Finance Minister and Central Bank Governor, Ortiz spoke of the Mexican devaluation in December 1994, its internal fiscal adjustment plan and final plea for international help. When Mexico ran out of its reserves, having to float its currency and guaranty Mexican debt, President Clinton took courageous steps, together with the IMF and the World Bank, and the situation turned around faster than was expected. This was also accomplished because Ortiz had the political support of the labor market, whose costs were high while real industry wages took awhile to recover. Return to the voluntary capital markets was rapid.
Buchheit described the scenario where, in his view, the creditors at the time of the Brady Plan were all commercial banks with common goals, so they acted in unison. With the debt accumulation of the late 1980’s (Argentina, Brazil, Ecuador), and more and more rollovers, debtor and creditor fatigue ensued. The time period between agreement and closing took longer as all debt of a country was consolidated into one restructuring agreement. As the secondary market developed, non-bank institutional (and other) investors not subject to the suasion of Rhodes or the regulators began to think differently than some of their banker colleagues, and unanimity was no longer possible (“it has become harder to track down the maverick bank”). The need for unanimity eventually brought down the Bank Advisory Committees (BACs) process, which could not possibly represent all the creditors. CACs (unveiled by Mexico in 2003 at the 75% level) arose as supermajority, similarly situated smaller creditors decided on courses of action and was one of the primary lessons of its day as to how to bind minority creditors to a restructuring.
In response to Schubert’s ”How far will the present period of private sector debt problems impact upon public sector debt in select countries?”, Rhodes replied that the market changed with the securitization of debt and now a critical mass is acceptable for a restructuring since unanimity is no longer possible. He was concerned about the future where sovereign debt was still a problem with its “borrowing binges”. As the Dollar strengthens and commitment to commodities increases, he sees major problems ahead and is concerned with major “blow-ups” that may lead to worldwide recession. The IMF’s optimism is too unrealistic (hence leading to trouble in Greece, etc.).
Concluding remarks included Mulford’s “one can’t go back to the days when a small group of similarly minded banks can solve things, [but] one size can’t fit all [for all countries’ solutions and] “hard choices will have to be made” and “may be forced by a crisis”. Europe is in for a huge problem - it is not a nation but trying to act like one, and is headed for a “moment of truth”. Corrigan’s concern that, in a time of the Federal Reserve’s increasing rates, other major regions and countries may go in the opposite direction; Buchheit’s remark that in a time of high commodity prices and low interest rates, “borrowing to the hilt” will lead to the fear that governments will take over the sovereign debt crisis; and Ortiz’s worry that Mexico will do nothing to solve its problems (although Chapter 11 worked for Vitro), that corporate debt is concentrated in Asia, and that the biggest risk for EM is the Central Bank and particularly the Fed, where “confusion can be amplified”.Panel Two Discussion – Our Market Grows and Develops
Martin Schubert (European InterAmerican Finance Corp.) moderated the panel, with the following speakers: Daniel Canel (AdCap), Manuel Mejia-Aoun (Alpha4x Asset Management), Jay Newman (Elliott Management Corporation), Hans Humes (Greylock Capital Management) and Daniel Marx (Quantum Finanzas). Panel Two Questions can be accessed by Clicking Here
In response to Schubert’s request to “share some funny stories coming out of your trading experiences over the years”, Canel recounted trading at a discount upsetting the Minister of Finance; Newman’s “there’s no riskless trade”; Humes’ “we speak English here”; Marx’s Japanese speaking Spanish and Mejia-Aoun’s “call Citibank for a par swap if you want to know how to do it”.
In response to Schubert’s question “What have you learned from your trades of Argentine, Venezuelan and Brazil debt or others that you would do differently today?”, Canel would have paid more attention to liquidity, having previously thought that the market was big enough to bear all trades of every magnitude. With LTCM unable to unwind its deals, hedge funds not working well, the current currency regulations that went from being “super-flexible” to “insanely problematic” with a big impact on the market, and an inability to prevent defaults, we need to “act now quickly” as we see problems arising (for example, Brazil and its corporate sector), educate the regulators on new structures and learn the lessons of capital flight.
Newman states that the relationship should be between creditors and debtors. With the advent of the US promoting the Brady Plan, we begin to see how our government is expressing interest in other governments and the private sector. Today there are a multiplicity of governments and institutions showing interest when really there should just be a “contract between the debtor and its creditors” (with Puerto Rico as a recent example).
Humes learned to appreciate how different situations can be viewed – in Argentina, Kirchner was motivated purely by politics and not economic cost; in Brazil, there was a market sell-off even though there was a good election.
Mejia-Aoun suggested swaps since new money bonds might be paid, while old bonds are unlikely to be paid.
Marx viewed the “short leash” approach of the ‘80’s as not as good as the longer term perspective, which may open up opportunities for new money in worthwhile projects vs just “plugging in loopholes”. There’s an inter-relationship between debt management techniques and financial changes, where financial engineering may help in the way fundamentals are dealt with, thus minimizing costs.
Schubert queried “With major political changes taking place in Argentina, and potentially Venezuela, as a result of recent elections, what will be the impact to Argentina and Venezuela (and other) debt trading?” and Hans replied that the recent election in Argentina is constructive, although he sees a potential for polarization. A resolution will come with “bumps on the road”. Venezuela is going in the right direction, although it’s still early on to judge. The “take-away” is that there’s a beginning of a reaction to the “leftist drift” in LatAm, and he was curious to see what transpires in Ecuador and Bolivia.
Canel viewed the Macri election as good news, although there were several challenges on internal and external fronts. If the adjustment plan takes time, it will be more painful for the population with an increase in inflation, and we may see a “run on the peso again”. The external hold-out problem must be fixed and Argentina needs a contingent line of funding.
Marx thought Argentina has more room to tighten and thus more room for improvement. While its people are fearful of adjustment and don’t think it’s necessary, over time, “reality will impose itself”, so he is cautiously optimistic. From an economic point of view, one can’t rely on FX exchange pricing, and politically one needs checks and balances.
For the best and worst pics in EM, Newman conceptually believes that the most attractive markets are likely to be in domestic debt if countries can manage their debt in an effective way (he admits that this may be counter-intuitive); and Mejia-Aoun views large EM countries with governments in power over 13 years (like Turkey and South Africa) as good bets (especially if there is political change, like in Argentina, that’s warranted once they hit “rock economic bottom”) and the price of oil will also be a factor.
Regarding predictions, Humes views the markets as becoming more sophisticated about credits by making distinctions among them, but the current regulatory environment led by regulators (who are not market savvy) will cause ensuing problems. Both Canel and Mejia-Aoun are troubled by the lack of liquidity and insufficient players that may lead to an impending crisis.
Panel Three Discussion – Our Market Matures and Mainstreams – Today and Tomorrow
Arturo Porzecanski (American University) moderated the panel, with the following speakers: Charles Blitzer (Blitzer Consulting), Susan Segal (Council of the Americas), Bruce Wolfson (Jaguar Growth Partners), Mark Walker (Millstein & Co. LLC), Scott Gordon (Taconic Capital Advisors) and Jose Pedreira (Waypoint Asset Management LLC). Panel Three Questions can be accessed by Clicking Here
In response to Porzecanski’s “What is your assessment of the significance of the Argentina litigation and arbitration sagas? What have we learned about the applicability of de jure creditor rights, the relevance of indentures and key clauses, the usefulness of judicial and arbitration venues, attitudes taken by the U.S. and other leading governments, and the degree of de facto impunity enjoyed by sovereigns?”, Blitzer posited that, in all cases except Argentina who is sui generis and was unwilling to negotiate with its creditors, the bond deals have been quicker and more long-lasting than the era of bank loan restructurings. Good behavior between debtors and creditors has led to good results, regardless of CACs. There was too much “hand-wringing” on the part of the official sector about the Argentine court decision without an appreciation of the many good other country restructurings. Walker disagreed, stating that the ability of hold-outs to extract what they want (and not just in Argentina) is seminal. Pedreira pointed to the lost time and opportunity.
Wolfson remarked that the biggest lesson relating to Argentina is how time was wasted that could have been redirected to make contracts better to facilitate restructurings. Because of our “single-minded obsession” with sovereigns other countries rallied with Argentina and its policies (which no one would be best served by replicating). The industry needs to look more at sustainability (instead of it being a coincidental by-product). As we have “taken our eye off the ball”, the process has become more adversarial and less functional (as opposed to the 80’s where there were more consensual relationships).
Porzecanski agreed stating that it was a “terrible disgrace” for everyone, who knows what the lingering repercussions of litigation will be, but it is clear that “sovereigns are called sovereigns because they can do whatever they please. Even if the law is on your side and you have rights and those rights are interpreted in your favor [by a court], it is very difficult to go against a recalcitrant sovereign debtor if the sovereign is not willing to play ball”.
Asked to comment on increased investor exposure to corporates, currency, governing law and other risks, Pedreira noted that a sovereign “can’t disappear”, and that there have been positive and quicker results in recent defaults even under local law (like Homebuilders on Mexico), but on the negative side one can lose recovery values being in the same pot as the local creditors. Gordon stated it varied by jurisdiction, and Segal agreed, citing Brazil and noting that if one doesn’t understand the “challenges of getting in, it is impossible to get out”. Walker felt that governing law has some bearing, but is not the principal side effect as the bias is not against the foreigners, but rather creditors generally.
In response to the claim that investment in Russia and Brazil looks worse than in China and India, but the roles may soon be reversed, Segal explained that there were different kinds of investors, and the big private equity investor may find great opportunities in Brazil (although it’s close to a depression and “the path to righting itself is very challenging”, the prosecutors and judges are “rock stars” so that’s an encouraging sign). Gordon saw no immediate visibility as to when Russia and Brazil may “bottom out”, so that leads to continued vulnerabilities and mark-to-market risk. The time for bargains in Russia was a year ago; now it’s fraught with geopolitical and market risk and is not that cheap.
Referring to the “vengeance return of populism in LatAm”, Pedreira thinks people are getting tired in Argentina and, with a difficult and bumpy road ahead, the government has the ability to blame the opposition if things don’t ”go right”. Segal believes that populism has “peaked in the southern hemisphere”, that Maduro in Venezuela can take power away from Congress with military controls and bring about vast shortages and that the country may need a Marshall Plan. Execution in Argentina at this early stage in the process will be a challenge and will take time. Blitzer sees qualitative institutional differences between Argentina and Venezuela. Governance and institutional issues are more difficult in Venezuela (although he doesn’t view the Marshall Plan as politically feasible, doesn’t think Venezuela can afford to default and, in the best of scenarios, can always avail itself of the Washington Consensus). He is more optimistic about Argentina (although there have been many years of political damage and “markets can get ahead of themselves”). Wolfson views Venezuela as a “failed government”, Brazil is “all about corruption” and a successor will not necessarily pursue better policies, and it’s not clear that populism is here to stay as we need to look at a “more nuanced world”. Walker claims the biggest problem is a country that borrows at unsustainable levels. Even if a debt when contracted might be sustainable, it may not be in a crisis. So, there needs to be constructive thought about how to improve the process, when parties should negotiate and reach resolution and consensus among a large amount of creditors.