Clauses & Controversies

(Why) Are ESG Sovereign Bonds (Such) Scams? Environmental, social, and governance (ESG) investing is white hot. Investors are clamoring for "green" bonds, "blue" bonds, and other instruments that supposedly fund investments in socially beneficial activity. And borrowers are happy to meet the demand. Maybe too happy. Do sovereign issuers of green bonds and other ESG instruments actually promise to do anything at all with the proceeds? Would such promises be enforceable even if they were made? Color us skeptical. No guest this episode. We discuss the legal terms in sovereign green bonds... or rather, the lack of legal terms. Producer: Leanna Doty

Does a Good ESG Score Lower Sovereign Borrowing Costs, or Does Cheaper Credit Leave More Room to Do ESG? Lupin Rahman, senior economist at PIMCO, is one of the gurus of the sovereign debt market. She is one of the very few who can talk with deep knowledge about the details of the fine print in sovereign debt contracts, the macro context of debt markets, and the importance of various Official Sector initiatives. We ask her about all of those matters, starting with the new popularity of ESG investing, the benefits and costs of these green and social strategies for sovereigns and investors (a topic on which Lupin and her co authors have a fascinating new paper, https://jfi.pm-research.com/content/early/2021/05/01/jfi.2021.1.112.abstract ) and ending up with QE and inflation fears. Producer: Leanna Doty

What Does it Mean to Say the Treasury Market is Risk Free? The U.S. Treasury market is supposed to be boring and risk free. As a result, it is largely ignored in the literature on sovereign debt, other than being used as a measure of the risk free rate in empirical studies. Our guest on this episode, Yesha Yadav (Vanderbilt Law), disagrees. While it is true that the U.S. government is relatively unlikely to default in payment (although that hasn't stopped it from doing so on a couple of famous occasions in the past), Yesha explains that there in fact are a host of risks lurking beneath the calm surface of the U.S. Treasury market. Yesha is one of the foremost experts in financial and securities regulation and has written extensively about risks stemming from lightly-regulated high frequency trading and other sources. She joins us to talk about why it's a mistake to think of treasury markets as risk free, the pitfalls of debt buybacks, and other topics. Producer: Leanna Doty

The Sovereign Debt Acronym Show DSA, SDR, DSSI. Sovereign debt insiders love to throw acronyms around in conversation to make us outsiders feel like, well . . . outsiders. Even the non-acronyms aren't exactly self-explanatory. Who knew the Paris Club isn't really a night club where sovereign debt folks hang out at after work? Aitor Erce, superstar sovereign debt scholar and veteran of multiple key institutions in the international financial apparatus (Bank of Spain, ESM) joins us to discuss the history and contemporary relevance of these institutions and to offer some critiques of how they function. We also talk about proposals to increase IMF allocations of SDRs in response to the covid crisis. And while we have Aitor, we ask how all of these acronyms – SDRs, DSAs, etc. -- play into the G20's Common Framework. All in all, lots to talk about. We will need to have Aitor back.

Did External Finance Produce Weaker States? In the first era of bond finance (roughly 1820-1920), countries often pledged customs revenues and other collateral to back their external debt. Conventional wisdom is divided as to whether these pledges were worth anything. After all, investors couldn't seize the ports on their own, and rich countries were only sometimes willing to do it for them. Didac Queralt (Yale) has done fascinating work on the relationship between external finance and the development of state institutions. Among his surprising findings are that investors did assign value to collateral, suggesting that these pledges were more enforceable than is often assumed. But he also highlights the long-term costs. Access to external capital may have allowed states to defer the development of robust tax systems. In short, ability to tap external finance may have produced weaker and less democratic states. We talk with Didac about his research. Producer: Leanna Doty

Josefin Meyer, a young star in the sovereign debt world, discusses her research on investors in sovereign bonds. They explore the astonishing returns investors have received despite defaults, like those in Lebanon and Argentina. The conversation delves into current Covid-era sovereign bond yields, including negative yields for Greece.

Veil Piercing and State-Owned Entities Disappointed creditors can attach a sovereign's assets when used for commercial activity in a foreign state. But much commercial activity is conducted not by the sovereign itself but by state-owned or controlled firms. In principle, this keeps assets away from creditors. But creditors have had recent success arguing they should be able to reach SOE-owned assets on the theory that the firm is the state's alter ego. Mark's recent article (linked below) tries to make sense of this somewhat incoherent area of law. Our dear friend, the incomparable Anna Gelpern, joins us to talk about veil piercing in sovereign debt cases, and about what lies ahead in sovereign debt markets. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3801204 Producer: Leanna Doty

Covid is Just Like the _______ Crisis In the current economic context, with many worried about the risk of widespread financial distress among emerging market sovereigns, scholars and policymakers often turn to the lessons of the Latin American debt crisis of the 1980s. But is that the right precedent? Do other historical episodes, such as the Great Depression, offer more insight? Maybe the current moment is unique? Economic historian Juan Flores Zendejas is an expert on financial crisis and sovereign debt and one of the most insightful thinkers about the uses of history in understanding financial markets and international economic relations. He joins us to discuss the economic consequences of the pandemic. Producer: Leanna Doty

Can Courts Help Right Historical Wrongs? In the early 1900s, the first genocide of the 20th century occurred in what was then the colony of German Southwest Africa (now Namibia). Perpetrated by the German government, decades of widespread seizure of property and imposition of forced labor were followed by the mass killing of tens of thousands of the Ovaherero and Nama peoples. In recent years, there has been talk of reparations, but these talks have not resulted in payment. So descendants of the genocide victims filed a lawsuit in federal court in New York, which ultimately failed. Matthias Goldmann has written insightfully about that lawsuit—and about many, many other things as well. He joins us to discuss, in the first half of the episode, Germany’s colonial past in Africa and efforts to use the courts to redress historical wrongs. In the second half, we get to ask Matthias about modern sovereign debt problems, especially Mozambique’s challenge to the enforceability of loans associated with the tuna bond scandal. Producer: Leanna Doty

Anna Gelpern and Christoph Trebesch discuss their unprecedented study on the legal terms of loans by Chinese state-owned entities to borrower governments around the world. They shed light on innovative and unexpected contracting practices, explore non-comparable treatment clauses in debt restructuring, examine leverage and pricing in Chinese lending, and emphasize the importance of carefully drafting provisions in contracts.