For the past decade, I’ve studiously avoided the world of sovereign debt, despite defections from friends like Al Brophy, Adam Feibelman, and Mark Weidemaier. But with the recent collapse of Dubai World and the resulting unease in the sovereign debt markets, I, like many others, have finally come to accept the inevitable: the sovereign debt markets may soon impact my life and work in ways that I can no longer ignore.
Guest appearances during the last week by Cleary Gottlieb Steen & Hamilton partner Lee Buchheit on Bloomberg and other media outlets drove this point home. Lee is an excellent and knowledgeable speaker, as the interview clips linked below demonstrate, and frequently guest lectures in my classes. One of the most memorable classes I’ve had, in fact, was a guest lecture by Lee to my seminar’s last meeting before the class graduated. In addition to a discussion of his substantive practice, Lee discussed the importance of actually loving your work, as well as ethics issues confronted by the transactional lawyer (when your practice involves helping governments and their leaders borrow large sums of money on the international market for purposes that are sometimes unclear, and occasionally suspicious, these considerations can loom large). I still – years later – receive emails from that group of students, and they frequently mention how much they enjoyed Lee’s visit.
I asked Lee’s frequent co-author, Mitu Gulati, to summarize the impact of Dubai World and the subsequent Greek ratings downgrade on the markets more generally. Below is his response:
In all of the drama of the financial meltdown over the past eighteen months or so, one segment of the global market has been relatively immune: sovereign debt (borrowing by nations). Indeed, relative to the rest of the market, the sovereign markets have thrived. As the domestic banking and corporate sectors of many nations have floundered, these countries have used their sovereign borrowing capacity to borrow and then bail out their weakened private sectors. As for those nations that found themselves in trouble (as was the case in a number of Eastern European countries), the IMF was there, ready and eager to hand out funds.
In hindsight, it is perhaps obvious that this state of affairs was not sustainable. At some point, sovereign borrowing inevitably reaches a level at which repayment becomes difficult (especially when the private sector bailouts don’t work). That point was perhaps reached roughly a month ago when Dubai had a default (it was corporate debt, but of a corporate entity where the government was a major holder). That produced concerns about the viability of other nations and the ratings downgrades of the debt of other nations (Greece being the most prominent).
All of this has produced much concern about whether the world is on the brink of another major financial crisis, this time with sovereigns. And if the sovereigns default, there is no one to bail them out (except perhaps the IMF, but it does not have limitless funds).
In a series of radio interviews with Bloomberg, Lee C. Buchheit, a partner at Cleary Gottlieb in New York, and the guru of sovereign debt, explains the current state of affairs. Even if you have no interest in sovereign debt or the potential for another global crisis, Buchheit is worth listening to just for the elegance with which he delivers his lines. One of the things about these interviews that stuck out was Buchheit’s explanation for why this particular sovereign debt crisis, if it occurs, will be different. This time, it is not the usual suspects such as Brazil and Mexico who are in the worst positions. Instead, it is the industrialized nations who have borrowed so very heavily to fund their bailouts.
The Modern Greek Drama: Comedy, Tragedy, or Both? (Reactions from Lee Buchheit)
The Modern Greek Drama, Part 2 (Reactions from Mitu Gulati)
Verge of the Unböring (The Modern Greek Drama, Part 3) (Reactions from Anna Gelpern)