Inside, confidential and off the record
Venezuela Sovereign debt
There's no bankruptcy court for countries
A major problem in sovereign debt restructuring is that there is no binding reorganization regime. If a company can't pay its debts, it files for bankruptcy, and a court restructures its debts to maximize the total recovery for creditors. The court's decisions are binding on all the creditors, eliminating the risk of holdouts and making possible an efficient restructuring. But there's no bankruptcy court for countries, and often no way to bind all creditors to a restructuring, and so a restructuring that might maximize value for creditors as a whole can be blocked by holdouts who want more money for themselves. (This is changing with collective-action clauses, but slowly.) But here are Lee Buchheit and Mitu Gulati with a fairly radical proposal :
The Executive Branch of the U.S. Government has very broad authority to settle claims of U.S. nationals against foreign sovereigns. Such claims may be settled without the consent of the U.S. citizens involved and sometimes even in the absence of consultation with those citizens.
… We believe that it would be within the President's power to issue an Executive Order --
• declaring the situation in a post-Maduro Venezuela to be a national emergency and amatter of concern for the national security and foreign policy of the United States,
• encouraging Venezuela and its creditors to reach a consensual settlement of all Chavez/Maduro-era monetary claims against the sovereign and public sector entities,
• immunizing Venezuelan assets in the United States from judicial restraint,
• allowing all U.S. creditors to vote on a negotiated restructuring proposal as a single class, with an affirmative vote of a specified supermajority of those creditors binding the entire class to the terms of the restructuring, and
• suspending access to U.S. courts for litigants -- including non-U.S. parties -- seeking a recovery inconsistent with the restructuring terms accepted by the supermajority of creditors.
It's an ad hoc sovereign bankruptcy regime created by U.S. executive order! Don't hold your breath for the Trump Administration to actually do it for Venezuela. One obvious problem with imposing a bankruptcy regime on Venezuelan bonds—now, long after the bonds were issued—is that it might upset market expectations, unsettle the market for sovereign debt generally, and reduce the appeal of issuing bonds under U.S. law. If the president did want to do this, he might want to make it clear that it's a one-off solution to a diplomatic problem rather than a general approach to sovereign debt restructuring. (The precedent that Buchheit and Gulati cite is a Reagan executive order cutting off U.S. claims on Iranian assets as part of hostage negotiations.)
Or he might not! Maybe creating a sovereign bankruptcy regime would just be good, and would make sovereign debt markets more robust and U.S. law more attractive, and the U.S. should (by executive order!) embrace it. Buchheit and Gulati write:
A proposal to suspend creditor legal remedies against a foreign sovereign would not normally be met with a glad cry from the investor community. But the overwhelming majority of creditors never attempt to pursue legal remedies; they understand that sovereign debt problems require negotiated, consensual resolutions. On second look, therefore, the ability of the U.S. Executive Branch to require a foreign sovereign to seek a negotiated outcome with its lenders, and to shield both the sovereign debtor and the vast majority of creditors who join such a debt restructuring from opportunistic behavior by holdouts, might be seen as a major benefit.
Matt Levine / Bloomberg /Sept. 04, 2018
(Excerpt from Matt levine 'Nobody Enjoys Earnings Season' )
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