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.
Related Posts:
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)