Lessons from Lee Buchheit,the premier sovereign debt restructuring attorney on the planet (& probably local radio host).
1/ Don't use reserves to pay debt service. If u use reserves, u can't afford it. BdL has been using reserves...imagine if he knew BdL reserves are depositor $
1/ Don't use reserves to pay debt service. If u use reserves, u can't afford it. BdL has been using reserves...imagine if he knew BdL reserves are depositor $
2/ Debt restructuring comes down to a "burden sharing decision", in Lebanon's case b/w foreign creditors, local creditors, Govt/taxpayer, Bank shareholders, & depositors. The IMF can strengthen the Govt's bargaining position but legitimizing its request for debt relief (& amount)
3/ A restructuring does NOT cause permanent damage to a country's reputation & credit. If it approaches creditors fairly and collaboratively and comes up with a sustainable solution, all will benefit, and the country can go back to the markets to borrow in 2 years at good rates.
4/ Most Govts want to avoid restructuring bonds held by local banks b/c each $100 of debt relief frm local banks is a $100 that must be borne by someone in the country: Bank shareholders or depositors, for ex. We shouldn't talk about ONLY restructuring portion held by local banks
5/ Creditors prefer to kick the can down the road by delaying debt repayments for few years so that if economy recovers, they can be repaid in full. This debt overhang is a drag on the economy.Leb needs a permanent solution (reducing debt) to avoid repeat restructuring in 3 years
6/ A constant theme over the last 40 years: Countries wait too long to make the decision (resulting in bigger losses and longer time to recover).
"The reserves have gone negative... I have no idea what that means but it sure sounds bad..." We feel you Lee.
"The reserves have gone negative... I have no idea what that means but it sure sounds bad..." We feel you Lee.
7/ This is one reason to be worried abt local banks dumping their bonds or passing costs to depositors. Creditors fear that the Govt will make them absorb a disproportionate share of losses to avoid making tough, politically costly decisions. THE SWORD OF THE LORD, nice one Lee.
8/ Sovereign debt is more than Eurobonds. It incl local currency debt, vendors to the Govt/trade finance,depositors who have claims against BdL (the State),& lenders to BdL. Everyone wants to be excluded from restructuring. Only few may warrant exclusion. No wastas!
That's it for now. I may share more later.
Links to full lecture:
