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Lee Buchheit: Back to reality

Sep 1, 2013

Latin America must not forget the lessons it has taught the world about restructuring, says sovereign debt veteran Lee Buchheit

By Ben Miller

For years, Latin America looked on as the eurozone stumbled under the weight of its debt. Some in the region even allowed themselves a hint of schadenfreude.

But, according to Lee Buchheit, partner at Cleary Gottlieb Steen & Hamilton and a veteran of sovereign debt restructurings, that could soon change.

Latin America, he says, is vulnerable to a change in both commodity prices and US interest rates. Both are poised to change – and in a manner not to the region’s advantage.

With Mexico’s Brady bond agreement in 1989, Latin America reminded the world the first lesson about sovereign debt: that it could be restructured. "Everyone knew that a bank loan could be restructured, but a sovereign bond hadn’t been restructured since the 1930s and 1940s," says Buchheit.

"The dearth of restructuring over the last five years in emerging markets generally has been a happy product of historically low interest rates and historically high commodity prices. When you get those two things it provides relief for countries that otherwise might have been the object of concern."

The US Federal Reserve has indicated it will pare back its extraordinary stimulus measures, as a prelude to eventually normalizing monetary policy. Meanwhile, commodity prices are dropping from record highs and growth is slowing across the region.

"If you have a significant drop in commodity prices and a significant rise in interest rates, it would begin to show some of the strains on those economies," says Buchheit. Stronger reserves, the development of local capital markets, and macroeconomic reforms, have helped many – but not all.

The coming years may bring further strains to the region – for large and small economies alike, Buchheit says. Caribbean nations have not benefitted as much from lower US interest rates and the commodity boom.

"The debt situation for many of these countries remains very fragile," Buchheit says, pointing to Belize, Grenada and Jamaica, which just completed its second restructuring in four years.

Lessons not learned

As markets enter a new phase of uncertainty, Latin American borrowers can draw from their experiences in the 1980s and 1990s.

In contrast, European countries battling with huge debts could themselves have learned from Latin America, says Buchheit, "but they have not paid attention."

"What you have seen in Europe is a prevailing belief – at the higher levels of policy makers – that sovereign debt restructuring is a unique affliction of emerging markets, and to worry about it, or do it, is to declare yourself emerging," he says.

In the 1980s the official sector wouldn’t lend a country like Mexico money to pay debt with commercial banks. Sovereign borrowers were told instead to reschedule. In Europe, the formula has been very different. "They have elected in every case, except for the belated Greek restructuring, to lend these countries all the money they need to repay in full and on time their bonds," he says, referring to bailout packages for Ireland and Portugal from the European Central Bank, European Union, and the IMF. In Greece’s debt restructuring, private creditors were persuaded to take haircuts.

"The debt stocks have migrated out of the hands of the private sector lenders on to the shoulders of European taxpayers. They are only now beginning to realize the consequence of that – that if a more savage form of restructuring is required, the axe is going to fall on the neck of the official sector." LF

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