By Ben Miller
Lee Buchheit: Back to reality
Latin America must not forget the lessons it has taught the world about restructuring, says sovereign debt veteran Lee Buchheit
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
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
"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
Lessons not learned
As markets enter a new phase of uncertainty, Latin American
borrowers can draw from their experiences in the 1980s and
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,"
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