The 1980s were, to Cleary Gottlieb's Lee Buchheit, something
of a baptism of fire into the world of sovereign debt.
What began in 1982 with a call for Cleary Gottlieb's help
from Mexico's finance minister, escalated rapidly over the
course of the decade with similar mandates from across the
region. In time, Cleary Gottlieb became the go-to firm for
countries seeking debt relief, and Buchheit, the legal
mastermind of choice for presidents and finance ministers
seeking help to call off creditors when their governments run
out of money.
It is all the more worrying, therefore, that today
Buchheit's sense of déjà vu is growing
by the day. It is, he says, as if Europe's policymakers have
"I'm hearing all the same things I heard in 1983," he
tells IFLR. "There is an irresistible tendency at
the outset of one of these crises to believe that it will be
all over soon. In fact, there hasn't been a debt crisis in my
lifetime where the people in charge have not adopted that
Certainly, it was true in the 1980s. Had you announced in
1983 there was just a chance the Latin American debt crisis
would not have been over by 1985, you would have been branded
a defeatist and banished from Manhattan Island.
That tendency for policymakers to jump straight to
short-term fixes led to the rolling over Latin America's debt
with no haircut to principal, a rising interest rate, and
consequently a mountainous debt stock to get pushed down the
"The same is true in Europe today, except the mountainous
debt stocks are getting even more mountainous," Buchheit
"The dilemma that policymakers face is that their stated
objective is to return these countries to voluntary market
access as quickly as possible," says Buchheit. "To that end,
they are insisting on massive austerity and fiscal adjustment
and all the rest of it. I thought they were moving away from
this practice of enabling debtor countries to pay their
existing bondholders in full and on time and legislating for
themselves preferred creditor status, but I no longer think
Buchheit insists this idea that the official sector will
assume all of these liabilities by lending, as part of
bailout packages, a gross amount of money to repay everyone
else in full and on time is seriously misguided.
"If there is any chance and come on, we all have to
admit there is a chance - that a debt restructuring is going
to be necessary at some point in order to return the
countries to a sustainable position, the one thing the
official sector did right in Latin America was not to take on
it owns shoulders the private sector debt," he says.
There are, he believes, many lessons Europeans should have
learned from Latin America circa 1980, but for various
reasons these are not being followed.
Lesson one: stop with the fairy dust
It is now up to the EU to determine how to bridge the
period between today and the point at which the eurozone
periphery stands a fighting chance of becoming competitive
and growing again.
To that end, he believes, the principal mistake European
policymakers have made is assuming liabilities that may well
someday need to be restructured.
"That has to be the first lesson learned: there are no
painless options," he says. "The belief that you can sprinkle
fairy dust on this problem and no one will suffer is
"I don't see how anyone can say that no debt
restructurings will ever be required for these countries," he
says. "They said that about Greece in May 2010, and 21 months
later Greece had to write off half of its private sector debt
Policymakers should not assume that the restructuring of
debt stocks is never going to happen and therefore should not
take on their own shoulders liabilities that may at some
point down the road need to be restructured. Because then its
taxpayers that will suffer that restructuring rather then the
people who actually lent the money.
"Hold the commercial creditors in place. Don't force them
to write anything down now," he says. "But whisper in their
ears that they should be putting something aside for a rainy
Lesson two: accept the risks of linking banks to
A second change that Buchheit believes needs to occur
relates to the linking of European banking sectors with their
sovereigns so that domestic banks could buy sovereign paper
and hold it on their books at zero risk weighting.
EU policymakers now profess to understand that there are
fatal risks associated with this activity.
But, says Buchheit, the solution that they are pursuing
will aggravate that very problem.
"When the European Central Bank pumps 2 trillion
into the hands of European commercial banks, they are doing
it with the hope and, frankly, expectation that that money
will go back into buying the bonds of the sovereigns,
bolstering the demand, reducing the yield and hopefully
keeping the sovereigns with an appearance of market access,"
"They profess to have recognised the weakness of this
activity in the past but I'm afraid that they may now be
further aggravating the issue."
Lesson three: the emerging markets can't help you
Finally, Buchheit advises, Europeans would be wise to
contemplate the possibility that the crisis will linger for
much longer than people hope it will.
"It's fanciful to believe that all of the EU periphery
will return to growth and competitiveness and effortless
market access if they are still carrying debt to GDP ratios
of 120 to 150%."
"You've got to be a congenital optimist to say this whole
thing is going to blow over in 18 months," he says. "I'm
fearful that it may be a number of years before these
countries are really in the position of sustainable
He would feel differently, he insists, if we were talking
about one or two countries in difficulty. "The problem here
is that nearly the whole world ex-China is in recession," he
says. "And everyone one of them, from Germany to the US, is
saying the same thing; export more and import less."
"How does any one country prosper by exports if every
other country is trying to prosper as well by exports? How
much do you really think the emerging markets can buy?"
For now, Buchheit believes one of two eventualities
inevitably awaits the EU; either the eurozone periphery
economic adjustment programmes will succeed, the affected
countries will return to credit worthiness and effortlessly
resume market access. Or, they won't.
If the latter, some restructuring of the debt stocks of
these countries will be necessary to make them presentable to
the market. And if those debt stocks have by then migrated
into the hands of the official sector, then the taxpayers of
those countries must feel the pain of the restructuring.
For more of IFLR's 30th anniversary coverage
More IFLR articles by Lee C
Restructuring a nation's debt
The coroner's inquest
We made it too complicated
The sovereign view